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W&M / OTHER / MACRO 102 / What is National savings?

What is National savings?

What is National savings?


School: The College of William & Mary
Department: OTHER
Course: Macroeconomics
Professor: Mark greer
Term: Spring 2019
Tags: Economics, Macroeconomics, ECON102, and exam
Cost: 50
Name: ECON102 Exam 2 Study Guide
Description: In depth study guide based on the topical study guide posted on Blackboard. Topics include: MPS MPC Consumption Saving Investment Multiplier Effect Aggregate Expenditure and many more
Uploaded: 03/18/2019
5 Pages 6 Views 9 Unlocks

WillCasale (Rating: )

---Maow exam 2

What is National savings?

National Savings

sanings by přvate sector t savings by public sector y Sinational) = S( government) + s (private)

Sinanicna) S+(T-G)

1 Scnantnal) +NCI = 14CG-T) {open economy bos national savings = investment spending

LI - Sinarionai) + NOI


b> I = (GDP-C-G) (IM-X) LI- Sinatonai) VIM-X) - atna > trade deficit Lo I - Scnational) ENCIL

Na trade surplus Lo + NCIE some of 1 is funded by sanngs of foreigners

L N CI e some of national savings is funding I in other countries Euture value

bhhere is the nominal interest rate a nis the number of years s concept: a sum of money in hand today will have a greater future value because If you want to learn more check out what is Conformist?

the money can be used to purchase an interest-beaning asset, nnich allows Sto grow Present Value

concept : adollar received at some point in the future is worth less than a dollar today because a person could put some amant less than a dollar into an interest-bearing

What is the definition of net present value?

asset today and receive a full dollar at that point in the future b DV=FV /(1+1) boften referred to as present discaunted valve" because future cash streams are

being discounted by the relevant interest rate

balso, the further out in the future you look, the more neanly the

4_tuture value is being discounted (ie larger n power indenominator) future dollars are less than a dollar today Linterest rate means the opportunity cost of investment spending that results in a

I future retum Net Present value

Lo the sum of the cash flows of an investment project, with outficus recorded negatively

and cash inflows recorded positively, with each How discounted to its present value b>NPV = -Linitial.cash outflow) + fcash inflow cre year from now) *Cash in how ayears) We also discuss several other topics like Why did Europe Rise?


+NPY > profitable b - NPV = not profitable

What is the meaning of future value?

Net Present Value, conta




4 as the interest rate used to discount future cash stream falls, the presenta

values of future cash inflows nses, while present value of eany year cash outflows not impacted so much as interest rates fall, investment projects that prenously had negative NPV and this

_not worth maling, Sning into positive nel territory, a are thus north marina supply of Loanable Funds

Supplied by savers, a savers incur an opportunity cost nnon the lend to a business

also supplied by households, government Lit running a budget surplus), and in foreign entities of running a trade dehut)

A supply of funds. ...

Goi nouseholds attitudes toward thinit

2. quernment budget surplus → bigger surplus more money to financa 3. trade defict bigger deficit, more foreign lending We also discuss several other topics like what is Dhimmi?

4. expected inflation inflation vychle of return 1, more inclination to save Dinfluences

li changes in private sarings behanor

42. changes in het capital inflows breason for positive relationships

the higher the nominal interest, the more attractive it is for basenolds

to sare rather than consume; therefore, quantity supplied T Demand for Loanable bun

by dermarked by firms, the government of running a budget deficit), and foreign We also discuss several other topics like What is meant by territorial sea?

entities (if running a trade Surplus) Lo demand:

1. Hirms degree of optimimor pessism about future business conditions

b> more optimistic > Investment 1 -> more demand 2. Sice of budget deficit → bioper deficit, more bomoning 3. sice of trade surplus → bigger surplus, more bomowing by foreign entities

4. inflation expectations if intation I realinterest ratev, firms borrow Linfluences

Lo changes in percared business opportunities

a changes in government borrowing breason for negative relationship

b> if nominai interest vate declines, then the present value of future cash inflans

from investment projects under consideration by firms increase therefore, an increasing number of investment projects have positive

net present valued are therefore worth undertaking; therefore, firms borrowings nise as they undertake more investment projects

Determination of interest rate

Lo more funds are being offered asloans at an interest rate

of i than borrowers are willing to borrow 1 . lenders who cannot find Domowers cut the interestrate offer,

so i falls to ie

changes in supply and Demand of LF

Istrade deficit


bo fall in supply of loanable funds. bfilms become more optimistic - Linvestment spending?

Lo increase in demand of LF be increase in budget deficit

b demand for loana de funds increases Lesnings from budget deficit to a surplus

L interest rates fall biat there's pressure on both supply-demand Lo can't exactly determine what happens to volume of loonable funds inflationary expectations fall bexpected real interest rates 1 Don't forget about the age old question of How does culture affect women's rights?

bo fall in demand b increase in supply

br effect on volume of Liis ambiguous investment Demandi Schedule

sif rate of return interest rate go for the project liquidity

Lo an asset is liquait it can be quickly converted to cash nith relatively little less We also discuss several other topics like 666 is also known as what?

of value Consumphon functie

ban equation showing now an ingin dial household's consumer spending vanes

with the nasehold's current disposable incomo b =a+mPC(yd)

bais autonomous consumption: the amount of spending a nasehold

huld do if it had ecno disposable income bmPC --Zayd → marginal propensity to consume

by mpct MPS= mpsi marginal propensity to save

Shills of the consumption Function

La changes in expected future disposable income

b) positive expectations will shift cure upward

to negative will shift it downward changes in aggregate health

Panise in aggregate health increases aggregate autonomous consumer


bo this shifts consumption function up d ates from

La decrease in aggregate nealth 7 consumption function Aggregate Shena

botatal amant of planned spending in the economy

HE (planned) = C+ Ilplanned) ? in an economy nith no govem ment spending a no foreign trade, there are a

sources of spending:

1. consumer spending

2. investment spending LG OP=C+ 6 Ya = GDP

6 C = A +MPC Cyd) aura Fursion

6 Yd=CTS

ismps - Asyayd = (1-MPC) Lo C = A + MPC (yd) b Saving function is how much saving would bo ya = A +mpelya) + s take place if yd were hypothetically, ceno. Los=- At Yd - mpc (Vd)

b S = -A+ (1-mpc) ya =57-Atmos (yd) Hggregale Expenditur


= A +MPC(4) + IP AE- A + IP+MPC CY)



by sinventones (or unplanned investment) A E=C+I since GDP-AE> 0 firms cut back on production

GOP falls y falls AE falls c falls (vice versa if GDP-19840)

bequilibrium occurs hhere total spending a total production L to calculate Ve, @Ye, A-GDP GDP = y )

s Ve=AHE/mps

b> yes 119+I)/MPS

ventory investment

Multiplier Effect


Bounplanned investment

howroor in sales bo unintended swings in inventories due to unforeseen changes in salto bactual investment = Icunplanned) + Ilmanned)

ensing inventories typically indicate positive unplanned Inventory invest

* Slowing economy as sales are less than forecast falling inventories typically indicate negative unplanned inventory

investment a growing economy, as sales are greater than Forecar

Shifts in investiment Spending can use circular flow diagram to

boli interest rate track the progression of the

bas interest rates nise, fewer . muitiplier ellect.

projects will be funded, by (see Multiplier Effect powerpoint)

and therefore in restent by affect one thing → influence many others

Spending will lower НЕ

L> 2. expected future real GDP ME' Dyesinine = Ymps b firms hill take on more

investment when they expect

their sales to grow o the higher the current capacity

the lower the investment

3 current level of production AE-GDRI

À +101


C+ IP = GAS IP = S, hnen AE=Y


Investment self-finanung

by ignoring qov. intematonal economic linkages, the only source of loanable

funds is private saving, and the only use is investment spending bif investment increases the pool of finances increases, and therefore

So does saning

nse in investment boost he boost GDP boost y boosts Paradox of Thinttu

thriftitness causes decline in mpc

causes C to fall, reduces AE pushes down GDP causes y to fall se



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