Econ - Chapter22-23
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Economic Growth Rate =
(Real GDP in current year - real GDP in previous year)/ (Real GDP in previous year) x 100%
Labour productivity is
Real GDP divided by aggregate labour hours
The growth of labour productivity depends on..
- -Physical capital growth
- -Human capital growth
- -Technological advances
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.
What are the funds firms use to buy physical capital called?
Gross Investement is
The total amount spent on purchases of new capital and on replacing depreciated capital.
The decrease in the quantity of capital that results from wear and tear and obsolescence.
Net investment =
Gross Investment - Depreciation
The amount of income not spent on taxes or consumption of goods and services
The value of things that people own
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
A financial instituions net worth is..
The total market value of what it has lent minus the market value of what it has borrowed.
If net worth is positive,
The insituion is solvent and can remain in business
If net worth is negative,
The instituion is insolvent and go out of business.
A finanicial instituiton is illiquid if,
It is solvent, but it does not have sufficient cash available to meet its current debt payments.
The market for loanable funds is..
The aggregate of all the individual financial markets.
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)
Financial Investment, I =
I = S + (T-G) + (M-X)
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.
The real interest rate is
the nominal interest rate adjusted to remove the effects of inflation on the buying power of money.
The real interest rate is approximately equal to
The nominal interest rate minus the inflation rate
The market for loanable funds is
the market in which households, firms, governments, and financial institutions borrow and lend.
The quantity of loanable funds demanded depends on
- The real interest rate
- Expected profit
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.
Expected profits and the demand for loanable funds move
In the same direction
The quantity of loanable funds supplied depends on:
- The real Interest Rate
- Disposible Income (Y - T)
- Expected future income
- Default risk
A change in disposible income causes a shift in the supply of loanable funds in
the same direction
Changes in expected future income, default risk, and wealth, shift the supply of loanable funds in the
(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
A government budget surplus increases the _____ of loanable funds
A government budget defecit increases the _____ of loanable funds
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.
-into the country in which the real interest rate is _____
-out of the country in which the real interest rate is _____
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.
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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