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EC 225 Chapter 10 Book/PowerPoint Notes

by: Danielle Rios

EC 225 Chapter 10 Book/PowerPoint Notes EC 225

Marketplace > Southeast Missouri State University > Economics > EC 225 > EC 225 Chapter 10 Book PowerPoint Notes
Danielle Rios
GPA 3.6

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About this Document

These notes outline Chapter 10 of Macroeconomics, 6th Edition by R. Glenn Hubbard and Anthony Patrick O'Brien. They also summarize the PowerPoint on Moodle.
Principles of Macroeconomics
Dr. Chen Wu
Class Notes
Economics, Macroeconomics
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This 4 page Class Notes was uploaded by Danielle Rios on Friday September 2, 2016. The Class Notes belongs to EC 225 at Southeast Missouri State University taught by Dr. Chen Wu in Fall 2016. Since its upload, it has received 10 views. For similar materials see Principles of Macroeconomics in Economics at Southeast Missouri State University.


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Date Created: 09/02/16
Chapter 10: Economic Growth, the Financial System, and Business Cycles 10.1 Long-Run Economic Growth  Long-Run Economic Growth: when the average standard of living (aka real GDP per capita) goes up because productivity increased o Real GDP per capita measures the standard of living per person  This is heavily relied on for comparisons between performance of one or more economies over various periods of time  See Figure 10.1 on pg. 315 for a reflection on how it has risen since the 1900’s  Economic Prosperity Correlates with Health o Life expectancy has risen since the 1900’s as household income has increased o Average intelligence, physical appearance and medical advances have increased since household income has increased o The amount of leisure hours has increased as household income has increased  See the charts on pages 316-317  Calculating Growth Rates and the Rule of 70 o ((Real GDP Growth Rate of Current Year - Real GDP Growth Rate of Previous Year) / Real GDP Growth Rate of Previous Year) * 100 o The average annual growth rate is used for long periods of time  (Real GDP Growth Rate of Year 1 + Real GDP Growth Rate of Year 2 + Real GDP Growth Rate of Year 3 + …etc.) / Total Number of Years o The Rule of 70 is used to approximate how many years it will take the real GDP per capita to double  Number of years to double = 70/Growth Rate  What Determines the Rate of Long-Term Growth? o Labor productivity: quantity of g/s one worker can produce in one hour, and it is determined by many factors:  Quantity of capital (goods which are used to produce other g/s) per hour worked  Total physical capital available is capital stock  Quantity of capital includes physical capital and human capital  Level of technology: what companies use to produce g/s  Entrepreneurs have an integral role when it comes to implementing changes in technology  Property Rights give people a sense of security which helps establish labor productivity o Prosperity increases as labor productivity and real GDP per capita increase  Potential GDP: is how much GDP is attained when firms produce at their capacity o Not the max capacity, but at optimal capacity o Increases as the labor force expands o See Figure 10.2 for comparisons of Real GDP and Potential GDP since 1989  When there is a large gap between the two, a recession occurred 10.2 Saving, Investing, and the Financial System  Retained earnings are the activities firms finance which expands operations  Financial system: financial markets and financial intermediaries which supplement funds to firms through households  An Overview of the Financial System o Financial Markets: financial securities (stocks and bonds are sold in this market) o Financial Intermediaries: (banks, mutual and pension funds and insurance companies borrow and lend in this)  The Services the Financial System Provides: Risk Sharing, Liquidity, and Information o Risk: the chance that the value of financial securities will change o Liquidity: how long it takes for financial securities to be exchanged for money o Information: facts about the expectations of the returns one will receive on their financial securities  The Macroeconomics of Saving and Investment o Total value of savings = total value of investment (aka national income accounting) o An open economy allows both trading of g/s and borrowing and lending to occur  Y = C + I + G + NX o A closed economy does not allow any trading with other economies  Y = C + I + G  The Savings Equals Investment Condition: investment in terms of the other variables which comprise GDP o I = Y – C – G (in a closed economy) o Private saving is what a household has left after purchasing g/s (C), paying taxes (T) and receiving transfer payments (TR)  Sprivate Y + TR – C – T o Public saving is the amount the gov. has left after making purchases and issuing transfer payments  Spublic T – G – TR o Total saving  S = SprivateS public  S = (Y + TR – C – T) + (T – G – TR)  S = Y – C – G  S = I  Budget Deficits and Surpluses o Balanced budget: gov. spends the same amount it collects in taxes o Budget deficit (dissaving/negative saving): gov. spends > they collect in taxes o Budget surplus: gov. spends < they collect in taxes  The Market for Loanable Funds: interactions between borrowers and lenders in an economy which determines the market interest rate for how many loanable funds are exchanged o See Figure 10.3 on page 326 for a visual on supply and demand in this market  Explaining Movements in Saving, Investment, and Interest Rates o Figure 10.4 on page 328 shows the effect an increase in demand has on the market for loanable funds  Can be used to show the effect on the gov. budget deficit  Crowding out: decreases in private expenditures is a result of an increase of gov. purchases o Figure 10.5 on page 329 shows the effect a budget deficit has on the market for loanable funds o For a step-by-step explanation on how budget deficits affect the economy, see Solved Problem 10.2 on page 330 Summary of the Loanable Funds Model on pg. 331 shows how certain variables affect the supply and demand curves in the Loanable Funds Market 10.3 The Business Cycle  Some Business Cycle Definitions o Expansion phase: when production, employment and income are increasing o Business cycle peak: when expansion ends o Recession phase: when production, employment and income are declining o Trough: when another period of expansion ends  Effects on the Business Cycle on: o Firms  Workers reduce spending as income decreases in a recession  Even in recessions food and clothing must be purchased  Purchases of durable goods are more widely affected by recessions o Inflation Rate  Rises toward the end of expansion, falls during recessions o Unemployment Rate  Increases during and right after recessions  Explaining the Great Moderation o The importance of services has increased which decreases the effect the business cycle has on GDP o The establishment of unemployment insurance has allowed households to continue making purchases during recessions o Active federal gov. stabilization policies have minimized the effects of recessions o All of these have increases the financial system’s stability Notes by Danielle Rios


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