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Lecture8_Macroeconomics_Scheiding

Lecture 8

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tscheidi
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7 views

Lecture8_Macroeconomics_Scheiding

Lecture 8

Uploaded by

tscheidi
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Lecture 8

Agenda:
 Discussion of Wall Street Journal
 Chapter 9

Chapter 9:

o We saw earlier that economies go through these peak and trough periods. We will
talk about business cycles in a bit more detail in this chapter as well as discuss how
long-run economic growth can be created
o Long-run economic growth can be captured by increases in real GDP
o Potential GDP The level of GDP attained when all firms are producing at capacity.
o Real GDP can be increased over the long-run as workers become more productive
o Workers can become more productive as the amount of capital they have to work
with increases
o This capital can take the form of education (human capital) or machines,
factories, tools, etc. (physical capital)
o As workers become more productive, they receive a higher real wage and their health
increases as well.
o The question then becomes one of how capital can be created. Since it takes lots of
funding to create capital, the financial system is important.
o The financial system consists of the stock market and bond market.
o Within the financial system there are banks, insurance companies, and mutual funds
that act as intermediaries between lenders and borrowers.
o Financial intermediaries ‘police’ the action of companies. They provide risk-sharing,
liquidity, and information for savers and borrowers.
o The interest rate earned reflects the risk and level of liquidity
o A simple supply-demand model of the financial system.
o One asset: “loanable funds”
o demand for funds: investment
o supply of funds: saving
o “price” of funds: real interest rate
o The demand for loanable funds…
o comes from investment:
Firms borrow to finance spending on plant & equipment, new office
buildings, etc. Consumers borrow to buy new houses.
o depends negatively on r,
the “price” of loanable funds
(cost of borrowing).

-1-
o

r
The
Theinvestment
investment
curve
curveisisalso
alsothe
the
demand
demandcurve
curvefor
for
loanable
loanablefunds.
funds.

I (r )

I
o The supply of loanable funds comes from saving:
o Households use their saving to make bank deposits, purchase bonds and other
assets. These funds become available to firms to borrow to finance
investment spending.
o The government may also contribute to saving
if it does not spend all the tax revenue it receives.
o private saving = (Y – T ) – C
o public saving = T – G
o national saving, S
o = private saving + public saving
o = (Y –T ) – C + T – G
o = Y – C – G

-2-
r

IfIf national
national
saving
saving does
does not not
depend
depend on on r,r,
the
the supply
supply
curve
curve is is vertical.
vertical.

S, I
o Alternatively, the supply of loanable funds can be set to rely on the interest rate.
o Finally, a few brief words on business cycles
o Real GDP (year 2000 as base year)

40,000

30,000

20,000

10,000

0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
o Why has the economy become more stable over time?

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o The increasing importance of services and the declining importance of
goods.
o The establishment of unemployment insurance and other government
transfer programs that provide funds to the unemployed.
o Active federal government policies to stabilize the economy.
o Recessions have certainly been less frequent and of shorter duration
LENGTH OF
PEAK TROUGH RECESSION
July 1953 May 1954 10 months
August 1957 April 1958 8 months
April 1960 February 1961 10 months
December 1969 November 1970 11 months
November 1973 March 1975 16 months
January 1980 July 1980 6 months
July 1981 November 1982 16 months
July 1990 March 1991 8 months
March 2001 November 2001 8 months
o

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