Econ Final 15-16

Front 1

long run growth stimulants

Back 1

Technology can increase capacity
Improvements in quality of labor, land capital.
Increased amounts of labor, land and capital.
Growth - can shift PPF outward, or improve potential output. Next Slide Sexton.

Front 2

Rule of 70

Back 2

Rule of 70-rough guide to how long a nation can take to double its output.
Years = 70/Annual Growth rate.
At 4%, output doubles in 70/4 = 17.5 years
Or Population. Suppose 3% population growth. 70/3 = 23.33 Years.
Or reverse: What growth rate to double output in 25 years? 25=70/%Growth. %Growth = 2.8%

Front 3

standard of living and productivity

Back 3

Standard of living closely connected to productivity growth. Higher productivity growth, higher standard of living in the future

Front 4

Productivity

Back 4

measured by the amount of goods and service a worker can produce in an hour.

Front 5

circular flow and productivity

Back 5

Aggregate values of all goods and service must equal payments to the (owners of) factors of production.
To increase consumption, must increase production in long run. (Similar to trade: Only way to import, is to export.)

Front 6

determines economic growth

Back 6

Quantity and quality of labor
Quantity and quality of land
Growth of physical capital
Technological advance

Front 7

polocies that will raise economic growth

Back 7

Raise the savings rate. Connect to investment
Research and development - investment and technology.
Protection of property rights
Free Trade
Education

Front 8

Financial markets

Back 8

households supply funds, banks and other institutions demand them. Financial intermediaries between households and businesses. Business is ultimate source of demand for funds.
Interest rate determined in financial markets, as interaction of supply and demand for funds, or money.

Front 9

Stock

Back 9

claim on profits of a publicly held or traded corporation. Owners of stock are called stockholders. Equity or ownership stake. Voting rights and share of profits directly determined by the number of shares owned.

Front 10

Initial public offering

Back 10

shares sold to public by the firm, coordinated by an investment bank. Firm receives proceeds of sale after deduction of fee by investment bank.

Front 11

perfered stock

Back 11

owners receive a fixed, regular dividend, regardless of profitability of the corporation.

Front 12

Bond

Back 12

instruments of debt for a corporation. Holder of bond is a creditor, so really a form of a loan. Bond is a debt obligation for a company. Corporations can raise money by issuing bonds, which are promises to repay.

Front 13

Bonds vs. Stock

Back 13

Bonds are paid first if company goes under

Greater financial security, but lower risk, thus lower return.

Front 14

Bonds and stocks

Back 14

Called securities

Expansion, optimism - higher value.
Recession, pessimism - lower value.

Front 15

Tip for stock market

Back 15

hard to follow buy a diversified portfolio

Front 16

Investment demand curve shifts

Back 16

Firms expect higher rates of return on investments - curve shifts right. More funds demanded at any given rate.
Lower expected rates of return shift the curve left. Less money demanded for investment at any given rate.
Other determinants include business taxes, technology, inventory, expectations.

Front 17

Savings supply curve

Back 17

If disposable (after tax) income rises, the supply of funds curve shifts right. More savings at any given interest rate. Possibly, but people might consume all the extra income.
If income falls, supply of funds falls, as less saving at any interest rate. More plausible, as people do not adjust consumption immediately.

Front 18

non interest determinants of supply

Back 18

Expected future earnings. Lower (higher)-save more (less) now. Curve to right (left).
People hold money for reasons other than investment. Precaution, transactions.

Front 19

Investment and savings graph

Back 19

Real rate > equilibrium: More money saved than used for projects. To induce borrowing and use, interest rate must fall.
Real rate < equilibrium: Not enough money for use for projects. Businesses bid up interest rate to get hold of funds.

Front 20

Savings

Back 20

S = (Y - T - C) + (T - G) T = Taxes
Private savings - amount left after taxes and consumption. (Y-T-C)
Public savings - Amount of money left after government pays for spending through taxes (T-G)

Front 21

Agregate Demand

Back 21

Aggregate Demand (AD) - the sum of the demand for all goods and services in the economy. Also, Real GDP demanded at different price levels, so that AD = C + I + G + (X-M)

Front 22

real wealth affect

Back 22

inflation adjusted (real) income goes up (down) if price level falls (rises), thus increasing (decreasing) quantity demanded for real GDP.

Front 23

intrest rate effect

Back 23

At higher price levels, people need to hold more dollars (money) to make the purchases they need to, thus increasing their demand for money/currency/funds.
If money supply is unchanged, interest rates rise, CP.
Higher rates- fewer investment projects are profitable, and the opportunity cost of borrowing increases. Reduces firm investment and consumer purchases of durables.
Fewer investment goods demanded, thus lowering real GDP.
Opposite effect if price level falls - demand for money for purchases falls, interest rates fall CP, and more investment projects become profitable. More demand for funds, increased investment and purchases of consumer durables, higher real GDP

Front 24

Agregate demand shifts

Back 24

Right - increase in AD. More real output demanded at given price levels. (Spending up)
Left - decrease in AD. Less real output demanded at given price levels. (spending down)

Front 25

More shifts agregate demand

Back 25

Increase in C, G, I, X-M, increases AD, shifts to right.
Decline in C, G, I, X-M, decreases AD, shifts to left.

59 -61

Front 26

Agregate supply

Back 26

how much output (real GDP) will be supplied at different price levels.

Front 27

working beyond pontential

Back 27

Economy can operate beyond potential, temporarily
Workers work overtime
Extend hours of part time workers
Reemployment of recent retirees.
Reduction of frictional unemployment through more extensive searches.

Front 28

cost push ups

Back 28

short run aggregate supply shifts left

Front 29

cost push up result

Back 29

Result is recessionary gap, with higher prices and lower output, and higher unemployment than before

Front 30

recession gap

Back 30

agregate demand falls
Self - correction possible through declining wages and prices. Workers are other factor owners bid down prices in a recession.
This shifts SRAS to right, and economy returns to potential output at a lower price level.