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Economic Growth Rate =
(Real GDP in current year - real GDP in previous year)/ (Real GDP in previous year) x 100%
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Labour productivity is
Real GDP divided by aggregate labour hours
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The growth of labour productivity depends on..
- -Physical capital growth
- -Human capital growth
- -Technological advances
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What is the one half rule?
A 1 percent increase in capital per hour of labour brings approximately a 1/2 percent increase in labor productivity.
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What are the funds firms use to buy physical capital called?
Finicial Capital
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Gross Investement is
The total amount spent on purchases of new capital and on replacing depreciated capital.
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Depreciation is
The decrease in the quantity of capital that results from wear and tear and obsolescence.
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Net investment =
Gross Investment - Depreciation
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Saving is
The amount of income not spent on taxes or consumption of goods and services
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Wealth is
The value of things that people own
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Savings is the source of funds used to finance investment. These funds are supplied and demanded in three types of finacial markets:
- Loan Markets
- Bond Markets
- Stock Markets
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A financial instituions net worth is..
The total market value of what it has lent minus the market value of what it has borrowed.
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If net worth is positive,
The insituion is solvent and can remain in business
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If net worth is negative,
The instituion is insolvent and go out of business.
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A finanicial instituiton is illiquid if,
It is solvent, but it does not have sufficient cash available to meet its current debt payments.
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The market for loanable funds is..
The aggregate of all the individual financial markets.
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Funds that finance investment come from three sources:
- Household savings , S
- Government Budget Surplus, (T-G)
- Borrowing from the rest of the world, (M-X)
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Financial Investment, I =
I = S + (T-G) + (M-X)
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The nominal interest rate is
The number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent.
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The real interest rate is
the nominal interest rate adjusted to remove the effects of inflation on the buying power of money.
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The real interest rate is approximately equal to
The nominal interest rate minus the inflation rate
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The market for loanable funds is
the market in which households, firms, governments, and financial institutions borrow and lend.
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The quantity of loanable funds demanded depends on
- The real interest rate
- Expected profit
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the demand for loanable funds is the realtionship between
the quantity of loanable funds demanded and the real interest rate when all other influences on borrowing plans remain the same.
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Expected profits and the demand for loanable funds move
In the same direction
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The quantity of loanable funds supplied depends on:
- The real Interest Rate
- Disposible Income (Y - T)
- Expected future income
- Wealth
- Default risk
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A change in disposible income causes a shift in the supply of loanable funds in
the same direction
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Changes in expected future income, default risk, and wealth, shift the supply of loanable funds in the
opposite direction
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(Short-run) changes in either the demand for loanable funds, the supply of loanable funds, or both bring (short-run) fluctuations in:
- Real interest rate
- Equilibrium quantity of funds lent or borrowed
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A government budget surplus increases the _____ of loanable funds
supply
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A government budget defecit increases the _____ of loanable funds
demand
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What is the Ricardo Barro effect?
- A budget deficit increases the demand for funds.
- Rational taxpayers increase saving, which increases the supply of funds.
- Crowding-out is avoided.
- Increased saving finances the deficit.
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Funds flow:
-into the country in which the real interest rate is _____
-out of the country in which the real interest rate is _____
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If a country's net exports are negative:
- the rest of the world supplies funds to that country
- the quantity of loanable funds in that country is greater than national saving.
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If a country's net exports are positive:
- the country supplies funds to the rest of the world
- the quantity of loanable funds in that country is less than national saving.
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