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25 Cards in this Set
- Front
- Back
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When we talk about a simple, private, closed economy, what do we mean by private and closed? |
Private means no government involved. Closed means no imports or exports. |
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In a closed private economy, how is the formula for the expenditure approach to GDP revised? |
In this case, the formula looks like: Y = C + I and that's all. Y - income earned / money spent C - Spending I - Investment |
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What is a mixed closed economy?
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An economy with private and public sectors. It is still closed, which means no imports or exports. |
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Where do the resources and income in an economy belong? |
It all belongs to the households. |
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What does S tend to mean in economics equations? What about Sg, Sp and Sn? How does Sn relate to Sg and Sp? |
S stands for savings. Sg stands for government savings, Sp is private savings, Sn is national savings. They relate in the equation: Sn = Sg + Sp |
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We have already spoken about the government's savings in this course, but we called it a different name. What was that name? |
We called it the government's budget position. It is equal to the taxes in, minus the governments spending, minus the government's transfer payments. |
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What is Sn equal to? How can we rearrange the GDP equation to isolate Sn, IF the economy is closed? |
Sn is another word for a nation's investment. We can rearrange the GDP equation as follows: Sn = I = Y - C - G (in a closed economy) |
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What decides how much money people borrow in order to invest? |
The interest rate at the time, and the rate of return on the investment they are considering. If the rate of return is higher than the interest rate, then they will borrow money. |
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What does what we know about borrowing and investment translate to in macroeconomics? |
It translates to: the lower the interest rate, the more borrowing will occur. |
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The lower the interest rate, the ___________ the demand for ___________. |
The lower the interest rate, the higher the demand for loanable funds. |
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How are the government's savings connected to the interest rate? |
Trick question: they aren't. The savings of the government depend on the tax code, the welfare programs, and the national defense, among other things. Therefore, they are independent of the interest rate. |
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At what point will the interest rate stabilise? What rule is this an example of? |
The interest rate will stabilise when the demand for loanable funds is equal to the demand for loanable funds. This is an example of the law of supply and demand. |
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Say the government enacts a policy that says people will receive investment tax credit for investing. How does this affect the loanable funds market? |
It increases the demand for loanable funds. It means that the point where the demand for loanable funds is equal to the supply of loanable funds will be pushed higher in terms of interest rate, and in terms of loanable funds in the market. |
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How does the governments budget policy affect the graph of interest vs. loanable funds? |
When there is an increase in the government deficit, ie. when the Sg decreases, the national savings decrease as well and the amount of money being spent on investment (I) goes down as well. This pushes the line of the supply in the loanable funds market down. |
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When we talk about the supply of loanable funds in the market, what is that synonymous to? |
The amount that the country is saving. |
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What does an increase in the government deficit imply about the future? |
It means that the interest rate will be driven upwards, less investment will occur and therefore in the future, we will have less physical capital than we potentially could have had. |
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We have been talking about a closed economy so far. If we open the economy, what do we have to worry about now? How do we think about this as it pertains to the investment market? |
Now we have to think about imports and exports, ie. net exports. Relating to tho investment market, we think of NX as NFI, which stands for Net Foreign Investment. |
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Say the national savings is equal to $100. The amount of money being invested is equal to $80. In an open economy, where does that extra money go? |
The money goes to NFI. That means the extra $20 is lent to foreigners. |
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What does the loanable funds market do when everybody expects inflation? |
The savers (the supply) will demand a 2% increase in the interest rate to compensate. The borrowers don't mind, because it's an inflation accommodation. |
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What is the Fisher Equation? What does it describe? |
The equation is: i = r + p^e It says that the nominal interest rate will increase in times of inflation as the sum of r (the real interest rate) and the expected rate of inflation. |
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Why do we pay banks to handle the saving and lending for us? |
Because the banks are providing a service. Direct loans (no intermediaries) are not as safe as indirect loans (intermediaries). |
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How do banks our money for us? |
They allow us to take out our money whenever we want, even as it is being loaned out. They can do this because they hold all the savings and take care of all the loans. |
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What are 'Loan-Backed Securities'? |
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How did the financial institutions contribute to the 2008 stock market crash? |
The fluctuations in the financial markets caused lost money, and lost confidence. |
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How is information in the market handled? |
If the market is efficient, then all information is publicly available. |
