Unit 4 Flashcards
(27 cards)
Who pays for investment spending
Individuals and firms
How do you calculate investment spending in a closed economy
I = GDP - C - G
Where do savings come from in a closed economy
in a closed economy come from households primarily but also from the government
How do you calculate household savings
s(private) = disposable income - consumption
= (GDP - T + TR) - C
How you calculate government saving
s(gov) = tax revenue - total expenditure
= T - TR - G
How do you calculate national saving
s(national) = s(private) + s(gov)
= (GDP - T + TR - C) + (T - TR - G)
= GDP - C - G
What is a budget balance
the difference between tax revenue and total government spending
What is a budget surplus
occurs when tax revenue exceed total expenditure
T - TR - G > 0
What is a budget deficit
when total expenditure exceeds tax revenue
T - TR - G < 0
What is physical capital
consists of manufactured resources such as buildings and machines
What is human capital
The improvement of labour force by education and knowledge
What is an inflow of funds
foreign savings that flow into a country can help finance domestic investment spending
What is financial capital
funds from savings that are available for investment spending
What is an outflow of funds
some domestic savings can flow out and finance investment spending in other countries
What is net capital inflow
= total inflow of foreign funds - total outflow of domestic funds
How is the interest rate calculated in the loanable funds market
The interest rate is the price of borrowing, calculated as percentage of the amount borrowed
What is national income in an open economy
GDP = C + I + G + X - IM
or can be written as
I = s(national) + net capital inflow
as (GDP - C - G) = s(national)
How is the rate of return calculated in the loanable funds market
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
What is the market for loanable funds
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
What is the demand in the loanable funds market
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
What causes shifts in demand in loanable funds market
Changes in perceived business opportunities
Changes in government borrowing
Crowding out
What is the relationship between demand and interest rates
The demand curve for loanable funds slopes downwards and the lower the interest rate the greater the quantity demanded
What is a present value calculation
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)
What is the relationship between supply and interest rates in the loanable funds market
The supply curve slopes upwards with higher the interest rate greater the quantity of loans supplied.
4% → $150 12% → $450
