Chapter 10 Flashcards
economy to be “strong” vs “weak” - short term
refers to the business cycle
alternating periods of economic expansion and recession
economy to be “strong” vs “weak” - long term
refers to the process by which rising productivity increases average standard of living
the most commonly used measure of this average standard of living is
real GDP per capita
real GDP per capita
production in the economy, per person, adjusted for changes in price level
with the rise of real GDP per capita, he average american
can buy more than 8x as many goods and services now as in 1950
why is real GDP per capita higher?
life expectancy, wealth, democracy
economic prosperity and health go hand-in-hand because
the richer nations can devote more resources to improving the health of their citizens (more healthy the more productive)
while growth in real GDP per capita is an important measure of our improvement, another important measure is the increase in our ___ ; these have also increased markedly over the last century
lifespans
another good measure of our economic prosperity is the amount of time we can spend on
leisure
-as our lifespan grows, we can spend more time on leisure
-increased productivity also means less time needed working, and more time for leisure
the growth rate of an economic variable like real GDP or real GDP per capita is equal to
the percentage change from one year to the next
long periods formula for average annual growth rate
current real GDP = previous real GDP x ( I + G )^t
g=
annual growth rate
t=
of years
rule of 70
shortcut to help determine how long it will take for an economic variable to double
rule of 70 equation
of years to double = 70/g
if the growth rate is 5%, it will take about ___ for the variable to double
70/5 = 14 years
what causes increases in real GDP per capita?
increases in labor productivity
labor productivity
quantity of good/services that can be produced by one worker (or by one hour of work)
most of the answer to “what determines the rate of long-run growth” is the same answer to
“what determines labor productivity growth”
capital
manufactured goods that are used to produce other goods and services
the more capital a worker has available to use,
the more productive they will be (also true for human capital)
for technological improvements in capital, we can say
“more capital” and “better capital” cause growth
potential GDP
refers to the level of real GDP is attained when all firms are operating at capacity
capacity
refers to “normal” hours and a “normal” sized workforce
potential GDP rises when
the labor force expands, when a nation acquires more capital stock, or when new technologies are created
the growth in potential GDP in the US has been relatively steady at about ___ that is, the potential to produce final goods and services has been growing in the US at about this rate over time
2-3%
the recession of 2007-2009 resulted in a wider than usual gap between
potential and actual GDP
how can actual GDP > potential GDP
people, capital, working longer hours than normal
“overheated” economy, inflation may result
microeconomics
firms want to grow, expand, get more market share, etc
firms can finance some of their own expansion through
retained earnings
firms often want to obtain more funds for expansion than are available in this way,
and get them in a more immediate time period
financial system
the system of financial markets and financial intermediaries through which firms acquire funds from households
financial markets
markets where financial securities, such as stocks and bonds, are bought and sold
financial security
a document (often electronic) states the terms under which funds pass from the buyer of the security to the seller
stock
a financial security representing partial ownership of a firm
bond
is a financial security promising to repay a fixed amount of funds
-essentially a loan from a household to a firm
financial intermediaries
firms, such as banks, mutual funds, pension funds, and insurance companies borrow funds from savers and lend them to borrowers
mutual funds
sell shares to savers then use the funds to buy financial securities
the financial system provides three key services
risk-sharing, liquidity, information
risk-sharing: by allowing investors to spread their money over many different assets,
investors can reduce their risk while maintaining a high expected return on their investment
liquidity
allows savers to quickly convert their investments into cash
information
prices of securities, represent the beliefs of other investors and intermediaries about the future payoffs from holding those securities
the total value of saving in the economy must equal
the total value of investment
equation for closed economy
Y = C + I + G
rearrange equation for investments
I = Y - C - G
private savings
savings by households
public savings
from the government
Sprivate is equal to all household income that is not spent
Sprivate = Y + TR - C - T
Spublic =
T - G - TR
total savings is
S = Sprivate + Spublic
Spublic is zero
balance budget
the government spends as much as it brings in
total savings simplified
savings = investment
Spublic is positive
budget surplus (very rare, last time 2001)
Spublic is negative
budget deficit
funding deficit
government borrows money by selling treasury security
- later: this may “crowd out” private investments
market for loanable funds
(conceptual) interaction between borrowers and savers
quality of funds traded
the price of money is the interest rate
firms are the demanders of loanable funds
they have a higher quality demanded of funds at lower interest rates, ceteris paribus
demand for funds has a
downward slope
households will save (more/less) funds at
(higher/lower) interest rates, ceteris paribus
if there is a technological advancements the demand shifts to the right because
firms will want to borrow and invest more funds at all interest rates
suppose the government runs a budget deficit
government borrows money by selling treasury securities. this takes away money from households, decreasing supply of funds
crowding out
decrease in investment spending due to an increase in government purchases spending
government borrowing at an increase of 1% of GDP will lead to
increase interest by 0.003 points
why is the effect so small?
interest rates are affected by many factors including global markets, a few billion dollars is pretty small
if any non-interest rate factor changes to make consumers want to save (more/less)
supply shifts (right/left)
if any non-interest rate factor changes so that firms want to borrow (more/less)
demand shift (right/less)
