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Economics > Unit 4 > Flashcards

Unit 4 Flashcards

1
Q

Who pays for investment spending

A

Individuals and firms

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2
Q

How do you calculate investment spending in a closed economy

A

I = GDP - C - G

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3
Q

Where do savings come from in a closed economy

A

in a closed economy come from households primarily but also from the government

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4
Q

How do you calculate household savings

A

s(private) = disposable income - consumption
= (GDP - T + TR) - C

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5
Q

How you calculate government saving

A

s(gov) = tax revenue - total expenditure
= T - TR - G

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6
Q

How do you calculate national saving

A

s(national) = s(private) + s(gov)
= (GDP - T + TR - C) + (T - TR - G)
= GDP - C - G

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6
Q

What is a budget balance

A

the difference between tax revenue and total government spending

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6
Q

What is a budget surplus

A

occurs when tax revenue exceed total expenditure
T - TR - G > 0

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7
Q

What is a budget deficit

A

when total expenditure exceeds tax revenue
T - TR - G < 0

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8
Q

What is physical capital

A

consists of manufactured resources such as buildings and machines

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9
Q

What is human capital

A

The improvement of labour force by education and knowledge

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10
Q

What is an inflow of funds

A

foreign savings that flow into a country can help finance domestic investment spending

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10
Q

What is financial capital

A

funds from savings that are available for investment spending

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11
Q

What is an outflow of funds

A

some domestic savings can flow out and finance investment spending in other countries

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11
Q

What is net capital inflow

A

= total inflow of foreign funds - total outflow of domestic funds

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11
Q

How is the interest rate calculated in the loanable funds market

A

The interest rate is the price of borrowing, calculated as percentage of the amount borrowed

12
Q

What is national income in an open economy

A

GDP = C + I + G + X - IM
or can be written as
I = s(national) + net capital inflow
as (GDP - C - G) = s(national)

13
Q

How is the rate of return calculated in the loanable funds market

A

The rate of return on a project is the profit earned on the project represented as a percentage of its cost
Rate of return = (revenue from project - cost of project) / cost of project x 100

13
Q

What is the market for loanable funds

A

The loanable funds market is a hypothetical market that examines the interactions between the demand for funds from borrowers and the supply of funds provided by lenders

14
Q

What is the demand in the loanable funds market

A

Firms borrow funds to finance investment projects
Investment is only worth making if it generates a future return that is greater than the cost of making the investment
You compare these values using present value calculations

14
Q

What causes shifts in demand in loanable funds market

A

Changes in perceived business opportunities
Changes in government borrowing
Crowding out

14
Q

What is the relationship between demand and interest rates

A

The demand curve for loanable funds slopes downwards and the lower the interest rate the greater the quantity demanded

15
Q

What is a present value calculation

A

is the amount of money needed today in order to receive a given amount at a future date, given the interest rate
Example → If you need a $1000 in a year and the interest rate is r, how much do you need to put in the bank now
X * (1 + r) = $1000
X = 1000 / (1 + r)

16
Q

What is the relationship between supply and interest rates in the loanable funds market

A

The supply curve slopes upwards with higher the interest rate greater the quantity of loans supplied.
4% → $150 12% → $450

17
Q

Why does the supply curve slope upwards

A

When people save and lend they forgo current consumption but are rewarded with more future consumption
Interest rate is the trade off between current consumption and future consumption
The higher the interest rate the more people are willing to frog current consumption

18
Q

What causes shifts in supply

A

Changes in private saving behaviour
Households may choose to increase savings for retirement at any interest rate
Changes in capital inflows
An increase in capital inflow raises the supply of funds available

19
Q

What is the fisher effect

A

an increase in expected future
inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged.

Economics (10 decks)

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