Ch. 20: Economic Growth, the Financial System, & Business Cycles Flashcards
Graph for Economic Growth
x-axis = time
y-axis = GDP
Goals for Economic Growth
- increase the trendline over time
- make booms less dramatic (recessions less deep)
Rule of 70
years to double economy = 70 / growth rate
How to accelerate economic growth?
(1) Increase Labor Producivity = the quantity of G&S that can be produced by one worker
(2) Increase Capital per Hour Worked
(3) Technological Change
What is financial intermediation?
buy money from one group, sell it to another group
Why does financial intermediation exist?
(1) diversification & security
(2) liquidity (can be turned into currency easily)
(3) more knowledge about the industry & who to lend money to
Closed Economy Equation for GDP
Y = C + I + G
I = Y - C - G
Private Savings (def & equation)
what households retain of their income after purchasing G&S and paying taxes
Sprivate = y + TR - C - T
y = household income
TR = transfer payments
Public Saving
amount of tax revenue the gov’t retains after paying for gov’t purchases & transfer payments
Spublic = T - G - TR
Total Savings Equation
S = Sprivate + Spublic
S = Y - C - G
S = I
I = investment spending
TOTAL SAVINGS = TOTAL INVESTMENT
Market for Loanable Funds Graph
x-axis = Loanable Funds ($/yr)
y-axis = real interest rate
Demand & Supply of Loanable Funds
demand = determined by wilingness of firms to borrow
supply = determined by willingness of households to save & the extent of gov’t saving
What shifts the Supply of LF to the left?
(1) increase in gov’t budget deficit
(2) increased desire of households to consume today
What shifts the Supply of LF to the right
increase in tax benefits for saving (401k)
What shifts demand of LF to the right?
increase in expected future profits from new investments
What shifts demand of LF to the left?
increase in corporate taxes
Long-Run Economic Growth
the process by which rising productivity increases the avg standard of living
How to calculate growth rate of real GDP?
(Final GDP - Initial GDP) / Initial * 100
Crowding Out
decline in private expenditures b/c of an increase in gov’t purchases
Gov’t Budget Surplus
spends less than it collects in taxes; increases total amount of saving in an economy
Gov’t Budget Deficit
gov’t spends more than it collects in taxes
Balanced Budget
gov’t spends same amount it collects
