Chapter 10 And 11 Econ

Front 1

Savings-investment spending identity

Back 1

savings and investment spending are always equal for the economy as a whole

Front 2

Savings-investment spending identity in a closed economy

Back 2

• GDP=C+I+G (Total income=Total spending)
• Therefore income can be spent on consumer spending plus gov’t purchases of g and s or saved
• GDP=C+G+S (Total income=consumption spending+savings)
• GDP=C+G+I (Total income=consumption spending+investment savings)
• C+G+S=C+G+I (Consumption spending=consumption spending+savings+investment spending
• S=I (Savings=Investment spending)
• S(national)=I=National savings=investment

Front 3

Budget Surplus

Back 3

is the difference between tax revenue and gov’t spending when tax revenue exceeds gov’t spending

Front 4

Budget deficit

Back 4

is the difference between tax revenue and gov’t spending when gov’t spending exceeds tax revenue

Front 5

Budget balance

Back 5

is the difference between tax revenue and gov’t spending

Front 6

National savings

Back 6

is the sum of private savings and the budget balance, us the total amount of savings generated w/in the economy
• S(national)=S(gov’t)+S(private)
S(gov’t)=T(tax revenues)-G-TR(gov’t transfers)

Front 7

Inflow of funds

Back 7

foreign savings that finance investment spending in that country

Front 8

Outflow of funds

Back 8

domestic savings that finance investment spending in another country

Front 9

New capital inflow

Back 9

is the total inflow of funds into a country minus the total outflow of funds out of a country
NCI=IM-X or I=(GDP-C-G)+(IM-X)
I(investment spending)=S(national)+(IM-X)=S(national)+NCI

Front 10

Loanable funds market

Back 10

is a hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders

Front 11

Demands for LF

Back 11

lower the interest rate, the greater the quantity of LF demanded
The higher the interest rate, the higher the opp cost of investment spending which means the lower the number of investment spending projects firms want to carry out, lower demand for LF
• Changes in perceived business opportunities
• Changes in gov’t borrowing

Front 12

Present Value

Back 12

of X is the amount of money needed today in order to receive X at a future date given the interest rate

Front 13

Supply of LF

Back 13

the higher the interest rate, the greater quantity of loanable funds supplied
• Changes in private savings behavior
• Changes in net capital inflows

Front 14

Crowding Out

Back 14

occurs when a gov’t budget deficit drives up the interest rate and leads to reduced investment spending

Front 15

Nominal interest rate rather than real:

Back 15

in the real world the borrowers nor lenders know what the future inflation rate will be when they make a deal

Front 16

According to the Fisher Effect:

Back 16

an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged
A household’s wealth is the value of its accumulated savings

Front 17

Financial Asset

Back 17

is a paper claim that entitles the buyer to future income from the seller (loan)=also stocks, bonds and bank deposits

Front 18

Wealth

Back 18

A household’s wealth is the value of its accumulated savings

Front 19

Financial Asset

Back 19

is a paper claim that entitles the buyer to future income from the seller (loan)=also stocks, bonds and bank deposits

Front 20

Physical Asset

Back 20

is a tangible object that can be used to generate future income

Front 21

Liability

Back 21

is a requirement to pay income in the future

Front 22

3 Problems facing borrowers and lenders

Back 22

transaction costs, risk and desire for liquidity

Front 23

Liability Tasks

Back 23

Task 1: Reducing Transaction Costs (are the expenses of negotiating and executing a deal
Task 2: Reducing risk Financial Risk (is uncertainty about future outcomes that involve financial losses or gains)
-asymmetrical way: most people experience the loss of welfare from losing a given amount of money more intensely than they experience the increase in welfare from gaining the same amount of money
-risk-averse: a person who is more sensitive to a loss than to a gain of an equal dollar amount
An individual can engage in diversification by investing in several different things so that the possible losses are independent events
Task 3: Providing liquidity

Front 24

Diversification

Back 24

An individual can engage in diversification by investing in several different things so that the possible losses are independent events

Front 25

Liquid

Back 25

An asset is liquid if it can be quickly converted into cash w/ relatively little loss of value

Front 26

Illiquid

Back 26

An asset is illiquid if it cannot be quickly converted into cash w relatively little loss of value

Front 27

Financial Assets

Back 27

Loan, bonds, loan-backed securities, stocks

Front 28

Loan

Back 28

is a lending agreement between an individual lender and an individual borrower

Front 29

Bonds

Back 29

IOU issued by the borrower. A default occurs when a borrower fails to make payments as specified by the loan or bond contract

Front 30

Loan backed securities

Back 30

is an asset created by pooling individual loans and selling shares in that pool (more diversification and liquidity than an individual loan)

Front 31

Financial intermediaries

Back 31

are institutions that transform the funds it gathers from many individuals into financial assets

Front 32

Mutual Funds

Back 32

is a financial intermediary that creates a stock portfolio and then results shares of this portfolio to individual investors (diversified portfolios)

Front 33

Pension Fund

Back 33

is a type of mutual fund that holds assets in order to provide retirement income to its members

Front 34

Life Insurance Company

Back 34

sells policies that guarantee a payment to a policyholder’s beneficiaries when the policyholder dies

Front 35

Bank deposit

Back 35

is a claim on a bank to give the depositor his or her cash when demanded

Front 36

Bank

Back 36

is a financial intermediary that provides liquid assets in the form or bank deposits to lenders and uses those funds to finance the illiquid investment spending needs of borrowers

Front 37

Efficient markets hypothesis

Back 37

According to the efficient markets hypothesis, asset prices embody all publicly available information

Front 38

Random walk

Back 38

is the movement over time of an unpredictable variable

Front 39

Marginal Propensity to Consume (MPC)

Back 39

is the increase in consumer spending when disposable income rises by $1 (=change in consumer Spending/change in disposable income)

Front 40

Marginal Propensity to Save (MPS)

Back 40

is the increase in household savings when disposable income rises by $1 (1-MPC)

Front 41

Autonomous change in aggregate spending

Back 41

is an initial change in the desired level of spending by firms, households or gov’t at a given level of real GDP

Front 42

Multplier

Back 42

is the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change (change in real GDP/change in autonomous change in aggregate spending)

Front 43

automatic stabilizers

Back 43

Taxes and some gov’t program acts are automatic stabilizers, which reduce the size of the multiplier

Front 44

Current disposable income

Back 44

is income after taxes are paid and gov’t transfers are received

Front 45

Consumer Function

Back 45

is an equation showing how an individual household’s consumer spending varies with the household’s current disposable income. (c(individual household consumer spending)=a(individual household autonomous consumer spending)+MPC*yd(individual household current disposable income))

Front 46

Slope of CF is

Back 46

Change in c/change in yd

Front 47

Aggregate consumption function

Back 47

is the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending
(C=A+MPC*YD) (no individual household)

Front 48

Sifts of the aggregate consumption function

Back 48

Shifts of the aggregate consumption function:
-Changes in expected future disposable income
-Changes in aggregate wealth
-Life-cycle hypothesis (consumers plan their spending over a lifetime, not just in response to their current disposable income

Front 49

Planned investment spending

Back 49

is the investment spending that businesses intend to undertake during a given period of time

Front 50

Accelerator principle

Back 50

a higher growth rate of real GDP leads to higher planned investment spending, but a lower growth rate of real GDP leads to lower planned investment spending

Front 51

Retained Earnings

Back 51

Past profits used to finance investment spending

Front 52

Inventories

Back 52

are stocks of goods held to satisfy future sales

Front 53

Inventory Investment

Back 53

is the value of the change in total inventories held in the economy during a given period.

Front 54

Unplanned inventory investment

Back 54

occurs when actual sales are more or less than businesses expected, leading to unplanned changes in inventories.

Front 55

Actual investment spending

Back 55

is the sum of planned investment spending and unplanned inventory investment (I=I(unplanned)+I(planned))

Front 56

Planned aggregate spending

Back 56

is the total amount of planned spending in the economy

Front 57

Income-expenditure equilibrium

Back 57

The economy is in income-expenditure equilibrium when aggregate output, measured by real GDP, is equal to planned aggregate spending

Front 58

Income-expenditure equilibrium GDP

Back 58

is the level of real GDP at which real GDP equals planned aggregate spending

Front 59

Keynesian Cross

Back 59

a diagram that identifies income-expenditure equilibrium as the point where the planned aggregate spending line crosses the 45-degree line.