Lecture 7: Savings, Investment and Government Debt

Size: px
Start display at page:

Download "Lecture 7: Savings, Investment and Government Debt"

Transcription

1 Lecture 7: Savings, Investment and Government Debt September 18, 2014 Prof. Wyatt Brooks

2 Problem Set 1 returned Announcements Groups for in-class presentations will be announced today SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 1

3 Financial Markets and Growth Financial Markets matter for growth China: Big movement of money in and out of the country Korea: Huge money flowing into the country during the height of its growth Also, they can be at the heart of crises Mexico: 1994 Russia: 1998 Asian Financial Crisis: 1997 Argentina over and over SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 2

4 Investment and Savings Two sides of financial markets Savers: checking accounts, holding stock, buying bonds, pension funds, etc. Investors: borrow money to expand business or meet their cash flow needs Have to understand both sides of the market, and how they interact SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 3

5 Different Kinds of Saving Private saving = The portion of households income that is not used for consumption or paying taxes = Y T C Public saving = Tax revenue less government spending = T G SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 4

6 National saving National Saving = private saving + public saving = (Y T C) + (T G) = Y C G = the portion of national income that is not used for consumption or government purchases SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 5

7 Saving and Investment Recall the national income accounting identity: Y = C + I + G + NX For now, focus on the closed economy case: Y = C + I + G Solve for I: national saving I = Y C G = (Y T C) + (T G) Saving = investment in a closed economy SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 6

8 Budget Deficits and Surpluses Budget surplus = an excess of tax revenue over govt spending = T G = public saving Budget deficit = a shortfall of tax revenue from govt spending = G T = (public saving) SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 7

9 U.S. Budget Deficits and Surpluses, Fraction of GDP ( ) SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 8

10 The Meaning of Saving and Investment Private saving is the income remaining after households pay their taxes and pay for consumption. Examples of what households do with saving: Buy corporate bonds or equities Purchase a certificate of deposit at the bank Buy shares of a mutual fund Let accumulate in saving or checking account Reduce credit card balances SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 9

11 The Meaning of Saving and Investment Investment is the purchase of new capital. Examples of investment: General Motors spends $250 million to build a new factory in Flint, Michigan. You buy $5000 worth of computer equipment for your business. Your parents spend $300,000 to have a new house built. Remember: In economics, investment is NOT the purchase of stocks and bonds! SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 10

12 The Market for Loanable Funds A supply-demand model of the financial system Helps us understand how the financial system coordinates saving & investment how government policies and other factors affect saving, investment, the interest rate SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 11

13 The Market for Loanable Funds Assume: only one financial market All savers deposit their saving in this market. All borrowers take out loans from this market. There is one interest rate, which is both the return to saving and the cost of borrowing. SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 12

14 The Market for Loanable Funds The supply of loanable funds comes from saving: Households with extra income can loan it out and earn interest. Public saving, if positive, adds to national saving and the supply of loanable funds. If negative, it reduces national saving and the supply of loanable funds. SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 13

15 The Slope of the Supply Curve Interest Rate 6% 3% Supply An increase in the interest rate makes saving more attractive, which increases the quantity of loanable funds supplied Loanable Funds ($billions) SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 14

16 The Market for Loanable Funds The demand for loanable funds comes from investment: Firms borrow the funds they need to pay for new equipment, factories, etc. Households borrow the funds they need to purchase new houses. SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 15

17 The Slope of the Demand Curve Interest Rate 7% 4% A fall in the interest rate reduces the cost of borrowing, which increases the quantity of loanable funds demanded. Demand Loanable Funds ($billions) SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 16

18 Equilibrium Interest Rate 5% Supply The interest rate adjusts to equate supply and demand. The equilibrium quantity of loanable funds equalizes investment and saving. Demand 60 Loanable Funds ($billions) SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 17

19 Policy 1: Saving Incentives Interest Rate S 1 S 2 Tax incentives for saving increase the supply of L.F. 5% 4% which reduces the eq m interest rate and increases the eq m quantity of L.F. D Loanable Funds ($billions) SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 18

20 Policy 2: Investment Incentives Interest Rate S 1 An investment tax credit increases the demand for L.F. 6% 5% D 2 which raises the eq m interest rate and increases the eq m quantity of L.F. D Loanable Funds ($billions) SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 19

21 A C T I V E L E A R N I N G 2 Exercise Use the loanable funds model to analyze the effects of a government budget deficit: Draw the diagram showing the initial equilibrium. Determine which curve shifts when the government increases its budget deficit. Draw the new curve on your diagram. What happens to the equilibrium values of the interest rate and investment? 20

22 A C T I V E L E A R N I N G 2 Answers Interest Rate S 2 S 1 A budget deficit reduces national saving and the supply of L.F. 6% 5% which increases the eq m interest rate and decreases the eq m quantity of L.F. and investment. D Loanable Funds ($billions) 21

23 Budget Deficits, Crowding Out, and Long-Run Growth Our analysis: Increase in budget deficit causes fall in investment. The government borrows to finance its deficit, leaving less funds available for investment. This is called crowding out. Investment determines the size of the physical capital stock and is one of the factors affecting national income. SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 22

24 Example: Why is the saving rate in China so high? China has a very high rate of savings It is the second largest economy, so this implies an extremely high quantity of savings Huge implications for international asset markets Very low interest rates A lot of money available for borrowing but why does China save so much? SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 23

25 Savings Around the World 5bncppjof8f9_&ctype=l&met_y=ny_gdp_pcap_p p_cd#!ctype=m&strail=false&bcs=d&nselm=s&m et_s=ny_gds_totl_cd&scale_s=lin&ind_s=false&i fdim=country&pit= &hl=en_us&d l=en_us&ind=false SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 24

26 The International Allocation Puzzle One puzzling feature of international capital flows: Typically, capital flows from poor, fast growing countries to rich, slow growing countries This is a puzzle for macroeconomic models Meaning it does not happen in our usual models, but it does in the data The reason we have trouble rationalizing this: If you are going to be much richer in the future, you should prefer to borrow today to consume and pay it off in the future when you re rich OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS 25

27 Example: China China has an extremely high savings rate and very fast growth They use their savings to buy low return US assets and send a lot of Chinese goods to the US Normally we think of people wanting to smooth their consumption over time Would prefer constant consumption today and tomorrow to very low consumption today and very high consumption tomorrow Yet this would predict that the US should be lending to China now OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS 26

28 Possible Explanations Many possible explanations have been proposed: Unusual age structure in China from the one child policy (Modigliani and Gao, 2004) In the near future, Chinese population will be very old so they are saving now to support consumption then Bad financial markets in China require entrepreneurs to save (Buera and Shin, 2011) Better insurance markets in the US make foreigners want to save here (Mendoza, Quadrini, Rios-Rul, 2009) OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS 27

29 Possible Explanations Many possible explanations have been proposed: Currency manipulation strategy: Normally if trade deficits are large, currency prices adjust to balance trade With high taxes and capital controls, the Chinese government uses dollars that enter the economy to purchase US government assets Keeps the RMB from adjusting in value Great example of a policy that maximizes Chinese GDP but is bad for Chinese welfare OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS 28

30 Next Class Next class: read chapter 14 Don t forget to start working on Problem Set #2 SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 29

7. Which of the following is not an important stock exchange in the United States? a. New York Stock Exchange

7. Which of the following is not an important stock exchange in the United States? a. New York Stock Exchange Econ 20B- Additional Problem Set 4 I. MULTIPLE CHOICES. Choose the one alternative that best completes the statement to answer the question. 1. Institutions in the economy that help to match one person's

More information

BPE_MAC1 Macroeconomics 1 Spring Semester 2011

BPE_MAC1 Macroeconomics 1 Spring Semester 2011 Masaryk University - Brno Department of Economics Faculty of Economics and Administration BPE_MAC1 Macroeconomics 1 Spring Semester 2011 Tutorial Session 4-18.03.2011, 11:05-11:50 a.m. Matching a. financial

More information

What three main functions do they have? Reducing transaction costs, reducing financial risk, providing liquidity

What three main functions do they have? Reducing transaction costs, reducing financial risk, providing liquidity Unit 4 Test Review KEY Savings, Investment and the Financial System 1. What is a financial intermediary? Explain how each of the following fulfills that role: Financial Intermediary: Transforms funds into

More information

PRACTICE- Unit 6 AP Economics

PRACTICE- Unit 6 AP Economics PRACTICE- Unit 6 AP Economics Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The term liquid asset means: A. that the asset is used in a barter exchange.

More information

Practice Problems Mods 25, 28, 29

Practice Problems Mods 25, 28, 29 Practice Problems Mods 25, 28, 29 Multiple Choice Identify the choice that best completes the statement or answers the question. Scenario 25-1 First National Bank First National Bank has $80 million in

More information

Chapter 3 A Classical Economic Model

Chapter 3 A Classical Economic Model Chapter 3 A Classical Economic Model what determines the economy s total output/income how the prices of the factors of production are determined how total income is distributed what determines the demand

More information

Big Concepts. Balance of Payments Accounts. Financing International Trade. Economics 202 Principles Of Macroeconomics. Lecture 12

Big Concepts. Balance of Payments Accounts. Financing International Trade. Economics 202 Principles Of Macroeconomics. Lecture 12 Economics 202 Principles Of Macroeconomics Professor Yamin Ahmad Big Concepts Balance of Payments Equilibrium The relationship between the current account, capital account and official settlements balance

More information

Savings, Investment Spending, and the Financial System

Savings, Investment Spending, and the Financial System Savings, Investment Spending, and the Financial System 1. Given the following information about the closed economy of Brittania, what is the level of investment spending and private savings, and what is

More information

QUIZ IV Version 1. March 24, 2004. 4:35 p.m. 5:40 p.m. BA 2-210

QUIZ IV Version 1. March 24, 2004. 4:35 p.m. 5:40 p.m. BA 2-210 NAME: Student ID: College of Business Administration Department of Economics Principles of Macroeconomics O. Mikhail ECO 2013-0008 Spring 2004 QUIZ IV Version 1 This closed book QUIZ is worth 100 points.

More information

Chapter 12. Aggregate Expenditure and Output in the Short Run

Chapter 12. Aggregate Expenditure and Output in the Short Run Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)

More information

The Return of Saving

The Return of Saving Martin Feldstein the u.s. savings rate and the global economy The savings rate of American households has been declining for more than a decade and recently turned negative. This decrease has dramatically

More information

13. If Y = AK 0.5 L 0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1,000.

13. If Y = AK 0.5 L 0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1,000. Name: Date: 1. In the long run, the level of national income in an economy is determined by its: A) factors of production and production function. B) real and nominal interest rate. C) government budget

More information

Econ 202 Section 2 Final Exam

Econ 202 Section 2 Final Exam Douglas, Fall 2009 December 17, 2009 A: Special Code 0000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 2 Final Exam 1. The present value

More information

Lecture 1: current account - measurement and theory

Lecture 1: current account - measurement and theory Lecture 1: current account - measurement and theory What is international finance (as opposed to international trade)? International trade: microeconomic approach (many goods and factors). How cross country

More information

Outline of model. Factors of production 1/23/2013. The production function: Y = F(K,L) ECON 3010 Intermediate Macroeconomics

Outline of model. Factors of production 1/23/2013. The production function: Y = F(K,L) ECON 3010 Intermediate Macroeconomics ECON 3010 Intermediate Macroeconomics Chapter 3 National Income: Where It Comes From and Where It Goes Outline of model A closed economy, market-clearing model Supply side factors of production determination

More information

Chapter 32 A Macroeconomic Theory of the Open Economy

Chapter 32 A Macroeconomic Theory of the Open Economy Chapter 32 A Macroeconomic Theory of the Open Economy TRUE/FALSE 1. Over the past two decades, the United States has persistently exported more goods and services than it has imported. ANS: F DIF: 1 REF:

More information

Aggregate Supply and Aggregate Demand

Aggregate Supply and Aggregate Demand Aggregate Supply and Aggregate Demand Econ 120: Global Macroeconomics 1 1.1 Goals Goals Specific Goals Be able to explain GDP fluctuations when the price level is also flexible. Explain how real GDP and

More information

2.5 Monetary policy: Interest rates

2.5 Monetary policy: Interest rates 2.5 Monetary policy: Interest rates Learning Outcomes Describe the role of central banks as regulators of commercial banks and bankers to governments. Explain that central banks are usually made responsible

More information

Practice Problems on Current Account

Practice Problems on Current Account Practice Problems on Current Account 1- List de categories of credit items and debit items that appear in a country s current account. What is the current account balance? What is the relationship between

More information

Lecture 1: The intertemporal approach to the current account

Lecture 1: The intertemporal approach to the current account Lecture 1: The intertemporal approach to the current account Open economy macroeconomics, Fall 2006 Ida Wolden Bache August 22, 2006 Intertemporal trade and the current account What determines when countries

More information

Reading the balance of payments accounts

Reading the balance of payments accounts Reading the balance of payments accounts The balance of payments refers to both: All the various payments between a country and the rest of the world The particular system of accounting we use to keep

More information

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 25 Exch Rate & BofP 1) Foreign currency is A) the market for foreign exchange.

More information

Macroeconomics, 10e, Global Edition (Parkin) Chapter 24 Finance, Saving, and Investment. 1 Financial Institutions and Financial Markets

Macroeconomics, 10e, Global Edition (Parkin) Chapter 24 Finance, Saving, and Investment. 1 Financial Institutions and Financial Markets Macroeconomics, 10e, Global Edition (Parkin) Chapter 24 Finance, Saving, and Investment 1 Financial Institutions and Financial Markets 1) The term "capital," as used in macroeconomics, refers to A) the

More information

MGE#12 The Balance of Payments

MGE#12 The Balance of Payments MGE#12 The Balance of Payments The Current Account, the Capital Account and the Balance of Payments Introduction to the Foreign Exchange Market Savings, Investment and the Current Account 1 From last session

More information

VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY

VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY A. Aggregate Demand and Prices 1. The aggregate demand/inflation (ADI) curve -- graphical representation of the negative relationship (downward sloping

More information

Finance (Basic) Ludek Benada Department of Finance Office 533 75970@mail.muni.cz

Finance (Basic) Ludek Benada Department of Finance Office 533 75970@mail.muni.cz Finance (Basic) Ludek Benada Department of Finance Office 533 75970@mail.muni.cz Structure of lectures Introduction to finance Financial markets Banks and bank systems Other financial institutions Present

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Survey of Macroeconomics, MBA 641 Fall 2006, Quiz 4 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The central bank for the United States

More information

MACROECONOMIC AND INDUSTRY ANALYSIS VALUATION PROCESS

MACROECONOMIC AND INDUSTRY ANALYSIS VALUATION PROCESS MACROECONOMIC AND INDUSTRY ANALYSIS VALUATION PROCESS BUSINESS ANALYSIS INTRODUCTION To determine a proper price for a firm s stock, security analyst must forecast the dividend & earnings that can be expected

More information

AGGREGATE DEMAND AND AGGREGATE SUPPLY The Influence of Monetary and Fiscal Policy on Aggregate Demand

AGGREGATE DEMAND AND AGGREGATE SUPPLY The Influence of Monetary and Fiscal Policy on Aggregate Demand AGGREGATE DEMAND AND AGGREGATE SUPPLY The Influence of Monetary and Fiscal Policy on Aggregate Demand Suppose that the economy is undergoing a recession because of a fall in aggregate demand. a. Using

More information

CHAPTER 3 THE LOANABLE FUNDS MODEL

CHAPTER 3 THE LOANABLE FUNDS MODEL CHAPTER 3 THE LOANABLE FUNDS MODEL The next model in our series is called the Loanable Funds Model. This is a model of interest rate determination. It allows us to explore the causes of rising and falling

More information

Econ 202 Section 2 Midterm 2

Econ 202 Section 2 Midterm 2 Douglas, Fall 2009 November 3, 2009 A: Special Code 0000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 2 Midterm 2 1. The sale of stocks

More information

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 23 Finance Saving Investment 1) Capital is A) the tools, instruments, machines,

More information

0 100 200 300 Real income (Y)

0 100 200 300 Real income (Y) Lecture 11-1 6.1 The open economy, the multiplier, and the IS curve Assume that the economy is either closed (no foreign trade) or open. Assume that the exchange rates are either fixed or flexible. Assume

More information

Practice Problems on Money and Monetary Policy

Practice Problems on Money and Monetary Policy Practice Problems on Money and Monetary Policy 1- Define money. How does the economist s use of this term differ from its everyday meaning? Money is the economist s term for assets that can be used in

More information

Open-Economy Macroeconomics: Basic Concepts. Open-Economy Macroeconomics: Basic Concepts Open and Closed Economies

Open-Economy Macroeconomics: Basic Concepts. Open-Economy Macroeconomics: Basic Concepts Open and Closed Economies In this chapter, look for the answers to these questions: 3 Open-Economy Macroeconomics: Basic Concepts How are international flows of goods and assets related? What s the difference between the real and

More information

Chapter 6 Economic Growth

Chapter 6 Economic Growth Chapter 6 Economic Growth 1 The Basics of Economic Growth 1) The best definition for economic growth is A) a sustained expansion of production possibilities measured as the increase in real GDP over a

More information

Practice Problems on the Capital Market

Practice Problems on the Capital Market Practice Problems on the Capital Market 1- Define marginal product of capital (i.e., MPK). How can the MPK be shown graphically? The marginal product of capital (MPK) is the output produced per unit of

More information

= C + I + G + NX ECON 302. Lecture 4: Aggregate Expenditures/Keynesian Model: Equilibrium in the Goods Market/Loanable Funds Market

= C + I + G + NX ECON 302. Lecture 4: Aggregate Expenditures/Keynesian Model: Equilibrium in the Goods Market/Loanable Funds Market Intermediate Macroeconomics Lecture 4: Introduction to the Goods Market Review of the Aggregate Expenditures model and the Keynesian Cross ECON 302 Professor Yamin Ahmad Components of Aggregate Demand

More information

Review for the Midterm Exam.

Review for the Midterm Exam. Review for the Midterm Exam. 1. Chapter 1 The principles of decision making are: o People face tradeoffs. o The cost of any action is measured in terms of foregone opportunities. o Rational people make

More information

Finance, Saving, and Investment

Finance, Saving, and Investment 23 Finance, Saving, and Investment Learning Objectives The flows of funds through financial markets and the financial institutions Borrowing and lending decisions in financial markets Effects of government

More information

Econ 202 Section 4 Final Exam

Econ 202 Section 4 Final Exam Douglas, Fall 2009 December 15, 2009 A: Special Code 00004 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 4 Final Exam 1. Oceania buys $40

More information

Economics 101 Multiple Choice Questions for Final Examination Miller

Economics 101 Multiple Choice Questions for Final Examination Miller Economics 101 Multiple Choice Questions for Final Examination Miller PLEASE DO NOT WRITE ON THIS EXAMINATION FORM. 1. Which of the following statements is correct? a. Real GDP is the total market value

More information

Economics. Open-Economy Macroeconomics: Basic Concepts. Introduction. In this chapter, look for the answers to these questions: N.

Economics. Open-Economy Macroeconomics: Basic Concepts. Introduction. In this chapter, look for the answers to these questions: N. C H A P T E R 31 Open-Economy Macroeconomics: Basic Concepts P R I N C I P L E S O F Economics N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 2009 South-Western, a part of Cengage Learning,

More information

Assessment Schedule 2014 Economics: Demonstrate understanding of macro-economic influences on the New Zealand economy (91403)

Assessment Schedule 2014 Economics: Demonstrate understanding of macro-economic influences on the New Zealand economy (91403) NCEA Level 3 Economics (91403) 2014 page 1 of 10 Assessment Schedule 2014 Economics: Demonstrate understanding of macro-economic influences on the New Zealand economy (91403) Assessment criteria with Merit

More information

International Economic Relations

International Economic Relations nternational conomic Relations Prof. Murphy Chapter 12 Krugman and Obstfeld 2. quation 2 can be written as CA = (S p ) + (T G). Higher U.S. barriers to imports may have little or no impact upon private

More information

Econ 102 The Open Economy

Econ 102 The Open Economy Winter 2007 Econ 102 The Open Economy 1. Be sure to read your copy of the Wall Street Journal every weekday, looking especially for items related to the material in this course. Find an article in this

More information

International Economic Relations

International Economic Relations nswers to Problem Set #5 International conomic Relations Prof. Murphy Chapter 5 Krugman and Obstfeld. Relative PPP predicts that inflation differentials are matched by changes in the exchange rate. Under

More information

MGEC61 International Economics: Finance

MGEC61 International Economics: Finance MGEC61 International Economics: Finance Introduction International finance is a study of problems and policies of an open economy. International finance studies the issues like unemployment, savings, trade

More information

Change Effect on nominal money demand Effect on real money demand Decrease in aggregate price level Shift nominal money demand to left Has no effect

Change Effect on nominal money demand Effect on real money demand Decrease in aggregate price level Shift nominal money demand to left Has no effect AP Macroeconomics Unit 4 Review Session Money Market 1. Draw the money market, indicating the equilibrium interest rate and quantity. 2. Use the following table to answer this question. Change Effect on

More information

Homework 5: The Monetary System and Inflation

Homework 5: The Monetary System and Inflation Homework 5: The Monetary System and Inflation Solutions 1. Be sure to read your copy of the Wall Street Journal every weekday, looking especially for items related to the material in this course. Find

More information

Chapter 13. Aggregate Demand and Aggregate Supply Analysis

Chapter 13. Aggregate Demand and Aggregate Supply Analysis Chapter 13. Aggregate Demand and Aggregate Supply Analysis Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics In the short run, real GDP and

More information

12/03/2012. Currencies and Exchange Rates

12/03/2012. Currencies and Exchange Rates The Canadian dollar is one of 100s of different monies. The three big monies: the U.S. dollar, yen, and euro. In February 2007, one Canadian dollar bought 85 U.S. cents. By November 2007, the Canadian

More information

Lecture 12: Benefits of International Financial Integration. Pros and Cons of Open Financial Markets

Lecture 12: Benefits of International Financial Integration. Pros and Cons of Open Financial Markets Lecture 12: Benefits of International Financial Integration Pros and Cons of Open Financial Markets Advantages of financial integration The theory of intertemporal optimization Other advantages Do financial

More information

Determinants of FX Rates: Chapter 2. Chapter Objectives & Lecture Notes FINA 5500

Determinants of FX Rates: Chapter 2. Chapter Objectives & Lecture Notes FINA 5500 Determinants of FX Rates: Chapter 2 Chapter Objectives & Lecture Notes FINA 5500 Chapter Objectives: FINA 5500 Chapter 2 / Determinants of Exchange Rates 1. To be able to explain in your own words why

More information

2.If actual investment is greater than planned investment, inventories increase more than planned. TRUE.

2.If actual investment is greater than planned investment, inventories increase more than planned. TRUE. Macro final exam study guide True/False questions - Solutions Case, Fair, Oster Chapter 8 Aggregate Expenditure and Equilibrium Output 1.Firms react to unplanned inventory investment by reducing output.

More information

3. a. If all money is held as currency, then the money supply is equal to the monetary base. The money supply will be $1,000.

3. a. If all money is held as currency, then the money supply is equal to the monetary base. The money supply will be $1,000. Macroeconomics ECON 2204 Prof. Murphy Problem Set 2 Answers Chapter 4 #2, 3, 4, 5, 6, 7, and 9 (on pages 102-103) 2. a. When the Fed buys bonds, the dollars that it pays to the public for the bonds increase

More information

Econ 330 Exam 1 Name ID Section Number

Econ 330 Exam 1 Name ID Section Number Econ 330 Exam 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If during the past decade the average rate of monetary growth

More information

Understanding the federal budget process and the recent history of outlays, revenues, deficits, and debt. Supply-side effects of fiscal policy

Understanding the federal budget process and the recent history of outlays, revenues, deficits, and debt. Supply-side effects of fiscal policy 29 Fiscal Policy Learning Objectives Understanding the federal budget process and the recent history of outlays, revenues, deficits, and debt Supply-side effects of fiscal policy Fiscal stimulus to fight

More information

Macroeconomics Series 2: Money Demand, Money Supply and Quantity Theory of Money

Macroeconomics Series 2: Money Demand, Money Supply and Quantity Theory of Money Macroeconomics Series 2: Money Demand, Money Supply and Quantity Theory of Money by Dr. Charles Kwong School of Arts and Social Sciences The Open University of Hong Kong 1 Lecture Outline 2. Determination

More information

1. Firms react to unplanned inventory investment by increasing output.

1. Firms react to unplanned inventory investment by increasing output. Macro Exam 2 Self Test -- T/F questions Dr. McGahagan Fill in your answer (T/F) in the blank in front of the question. If false, provide a brief explanation of why it is false, and state what is true.

More information

MACROECONOMICS. The Monetary System: What It Is and How It Works. N. Gregory Mankiw. PowerPoint Slides by Ron Cronovich

MACROECONOMICS. The Monetary System: What It Is and How It Works. N. Gregory Mankiw. PowerPoint Slides by Ron Cronovich 4 : What It Is and How It Works MACROECONOMICS N. Gregory Mankiw Modified for EC 204 by Bob Murphy PowerPoint Slides by Ron Cronovich 2013 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL

More information

Explain how borrowing and lending decisions are made and how these decisions interact in the loanable funds market.

Explain how borrowing and lending decisions are made and how these decisions interact in the loanable funds market. Finance, Saving, and Investment Chapter CHAPTER CHECKLIST Describe the financial markets and the key financial institutions. Finance is the lending and borrowing that moves funds from savers to spenders.

More information

Greening Jobs and Growth Potential in Europe

Greening Jobs and Growth Potential in Europe Greening Jobs and Growth Potential in Europe Prof. Diana Mangalagiu Smith School of Enterprise and Environment, Oxford University & Global Climate Forum diana.mangalagiu@smithschool.ox.ac.uk GREEN JOBS

More information

Chapter 5. Saving and Investment in the Open Economy. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 5. Saving and Investment in the Open Economy. 2008 Pearson Addison-Wesley. All rights reserved Chapter 5 Saving and Investment in the Open Economy Chapter Outline Balance of Payments Accounting Goods Market Equilibrium in an Open Economy Saving and Investment in a Small Open Economy Saving and Investment

More information

Answer: Long term, because it is more likely that you may need to sell the long-term bond at a depressed price prior to maturity.

Answer: Long term, because it is more likely that you may need to sell the long-term bond at a depressed price prior to maturity. Chapter 26 1. Fly-by-night Corporation is in need of capital funds to expand its production capacity. It is selling short- and long-term bonds and is issuing shares. You are considering the prospect of

More information

Interest Cost of Money Test - MoneyPower

Interest Cost of Money Test - MoneyPower Interest Cost of Money Test - MoneyPower Multiple Choice Identify the choice that best completes the statement or answers the question. 1. To determine the time value of depositing $100 in a savings account,

More information

Econ 202 Section H01 Midterm 2

Econ 202 Section H01 Midterm 2 , Spring 2010 March 16, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section H01 Midterm 2 Multiple Choice. 2.5 points each. 1. What would

More information

Econ 102 Section 1 Homework #5 Due July 7, Tuesday in class

Econ 102 Section 1 Homework #5 Due July 7, Tuesday in class Econ 102 Section 1 Homework #5 Due July 7, Tuesday in class Multiple Choice Questions (1-10: 10x1=10 points; 11-55: 45 x 2=90 points) 1.The principal amount of a bond is the amount: A) originally lent.

More information

MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL*

MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* Chapter 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* Key Concepts The Demand for Money Four factors influence the demand for money: The price level An increase in the price level increases the nominal

More information

FLEXIBLE EXCHANGE RATES

FLEXIBLE EXCHANGE RATES FLEXIBLE EXCHANGE RATES Along with globalization has come a high degree of interdependence. Central to this is a flexible exchange rate system, where exchange rates are determined each business day by

More information

Investments 2: Creating a Personal Investment Plan. Assignments

Investments 2: Creating a Personal Investment Plan. Assignments Financial Plan Assignments Assignments Open your copy of Learning Tool 5A: Investment Plan Example. Make sure you understand the terminology related to investment plans. I will discuss many aspects of

More information

THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL

THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL Previously The original Solow model focused on capital investment as the main source of economic growth. Modern growth theory now recognizes that institutions

More information

Refer to Figure 17-1

Refer to Figure 17-1 Chapter 17 1. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change

More information

Chapter 11. Long-Run Economic Growth: Sources and Policies

Chapter 11. Long-Run Economic Growth: Sources and Policies Chapter 11. Long-Run Economic Growth: Sources and Policies Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Economic Growth from 1,000,000

More information

1. Various shocks on a small open economy

1. Various shocks on a small open economy Problem Set 3 Econ 122a: Fall 2013 Prof. Nordhaus and Staff Due: In class, Wednesday, September 25 Problem Set 3 Solutions Sebastian is responsible for this answer sheet. If you have any questions about

More information

Practice Exam 3 Fall 2015

Practice Exam 3 Fall 2015 Global Macroeconomics ::Solutions:: Practice Exam 3 Fall 2015 Do not open this exam until instructed to do so. You have 75 minutes to complete this exam You may use a calculator; you may not use any other

More information

1 Multiple Choice - 50 Points

1 Multiple Choice - 50 Points Econ 201 Final Winter 2008 SOLUTIONS 1 Multiple Choice - 50 Points (In this section each question is worth 1 point) 1. Suppose a waiter deposits his cash tips into his savings account. As a result of only

More information

Final. 1. (2 pts) What is the expected effect on the real demand for money of an increase in the nominal interest rate? How to explain this effect?

Final. 1. (2 pts) What is the expected effect on the real demand for money of an increase in the nominal interest rate? How to explain this effect? Name: Number: Nova School of Business and Economics Macroeconomics, 1103-1st Semester 2013-2014 Prof. André C. Silva TAs: João Vaz, Paulo Fagandini, and Pedro Freitas Final Maximum points: 20. Time: 2h.

More information

Chapter 1. Why Study Money, Banking, and Financial Markets?

Chapter 1. Why Study Money, Banking, and Financial Markets? Chapter 1 Why Study Money, Banking, and Financial Markets? Why Study Money, Banking, and Financial Markets To examine how financial markets such as bond, stock and foreign exchange markets work To examine

More information

Key elements of Monetary Policy

Key elements of Monetary Policy Key elements of Monetary Policy Part II Economic Policy Course for Civil Society June 2004 World Bank Institute Structure of the Presentation Introduction Current account Balance of Payments Debt Current

More information

Chapter 8: The Monetary System, Money Growth and Inflation. Readings: Chapter of Principles of Economics textbook (Mankiw)

Chapter 8: The Monetary System, Money Growth and Inflation. Readings: Chapter of Principles of Economics textbook (Mankiw) Chapter 8: The Monetary System, Money Growth and Inflation Readings: Chapter 29-30 of Principles of Economics textbook (Mankiw) In this chapter, look for the answers to these questions: What assets are

More information

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5 Econ 202 Final Exam 1. If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher. b. left, so that at any inflation rate unemployment

More information

Monetary policy, fiscal policy and public debt management

Monetary policy, fiscal policy and public debt management Monetary policy, fiscal policy and public debt management People s Bank of China Abstract This paper touches on the interaction between monetary policy, fiscal policy and public debt management. The first

More information

FISCAL POLICY* Chapter. Key Concepts

FISCAL POLICY* Chapter. Key Concepts Chapter 11 FISCAL POLICY* Key Concepts The Federal Budget The federal budget is an annual statement of the government s expenditures and tax revenues. Using the federal budget to achieve macroeconomic

More information

Velocity. The quantity theory of money 2/18/2016. ECON 3010 Intermediate Macroeconomics

Velocity. The quantity theory of money 2/18/2016. ECON 3010 Intermediate Macroeconomics % change from 12 mos. earlier 2/18/2016 U.S. inflation 1960 2012 ECON 3010 Intermediate Macroeconomics 12% 10% 8% % change in GDP deflator Chapter 5 Inflation: Its Causes, Effects, and Social Costs 6%

More information

What Will Happen When Foreigners Stop Lending to the United States?

What Will Happen When Foreigners Stop Lending to the United States? Economic Policy Paper 13-4 Federal Reserve Bank of Minneapolis What Will Happen When Foreigners Stop Lending to the United States? Timothy J. Kehoe* University of Minnesota, Federal Reserve Bank of Minneapolis

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chatper 34 International Finance - Test Bank MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The currency used to buy imported goods is A) the

More information

Agenda. Saving and Investment in the Open Economy. Balance of Payments Accounts. Balance of Payments Accounting. Balance of Payments Accounting.

Agenda. Saving and Investment in the Open Economy. Balance of Payments Accounts. Balance of Payments Accounting. Balance of Payments Accounting. Agenda. Saving and Investment in the Open Economy Goods Market Equilibrium in an Open Economy. Saving and Investment in a Small Open Economy. Saving and Investment in a Large Open Economy. 7-1 7-2 Balance

More information

Edmonds Community College Macroeconomic Principles ECON 202C - Winter 2011 Online Course Instructor: Andy Williams

Edmonds Community College Macroeconomic Principles ECON 202C - Winter 2011 Online Course Instructor: Andy Williams Edmonds Community College Macroeconomic Principles ECON 202C - Winter 2011 Online Course Instructor: Andy Williams Textbooks: Economics: Principles, Problems and Policies, 18th Edition, by McConnell, Brue,

More information

This Report has been prepared for: John & June

This Report has been prepared for: John & June Trader Makes $4 Billion Wiz Kid Stock & Option Trader Makes $4 Billion Trading Stock Options! Budget Reporting Software Discover Why BudgetPak Provides thebest Financial Reporting & Analysis Input Forms

More information

a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis

a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis Determinants of AD: Aggregate demand is the total demand in the economy. It measures spending on goods and services by consumers, firms, the

More information

Chapter 13: Aggregate Demand and Aggregate Supply Analysis

Chapter 13: Aggregate Demand and Aggregate Supply Analysis Chapter 13: Aggregate Demand and Aggregate Supply Analysis Yulei Luo SEF of HKU March 25, 2013 Learning Objectives 1. Identify the determinants of aggregate demand and distinguish between a movement along

More information

MEASURING GDP AND ECONOMIC GROWTH CHAPTER

MEASURING GDP AND ECONOMIC GROWTH CHAPTER MEASURING GDP AND ECONOMIC GROWTH CHAPTER Objectives After studying this chapter, you will able to Define GDP and use the circular flow model to explain why GDP equals aggregate expenditure and aggregate

More information

CHAPTER6. The Open Economy. Modified for ECON 2204 by Bob Murphy

CHAPTER6. The Open Economy. Modified for ECON 2204 by Bob Murphy CHAPTER6 The Open Economy Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: Accounting identities for the open economy The small open economy

More information

At the end of Chapter 10, you will be able to answer the following:

At the end of Chapter 10, you will be able to answer the following: 1 Objectives for Chapter 10 The Circular Flow Model At the end of Chapter 10, you will be able to answer the following: 1. Explain the basic circular flow model. 2. Define "consumption" and "saving" 3.

More information

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Sample Final Exam Name Id # Part B Instructions: Please answer in the space provided and circle your answer on the question paper as well.

More information

Fixed Exchange Rates and Exchange Market Intervention. Chapter 18

Fixed Exchange Rates and Exchange Market Intervention. Chapter 18 Fixed Exchange Rates and Exchange Market Intervention Chapter 18 1. Central bank intervention in the foreign exchange market 2. Stabilization under xed exchange rates 3. Exchange rate crises 4. Sterilized

More information

Economics 152 Solution to Sample Midterm 2

Economics 152 Solution to Sample Midterm 2 Economics 152 Solution to Sample Midterm 2 N. Das PART 1 (84 POINTS): Answer the following 28 multiple choice questions on the scan sheet. Each question is worth 3 points. 1. If Congress passes legislation

More information

AP Macroeconomics. Practice Exam. Advanced Placement Program

AP Macroeconomics. Practice Exam. Advanced Placement Program Advanced Placement Program AP Macroeconomics Practice Exam The questions contained in this AP Macroeconomics Practice Exam are written to the content specifications of AP Exams for this subject. Taking

More information

Economics. Total marks 100. Section I Pages marks Attempt Questions 1 20 Allow about 35 minutes for this section

Economics. Total marks 100. Section I Pages marks Attempt Questions 1 20 Allow about 35 minutes for this section 2011 HIGHER SCHOOL CERTIFICATE EXAMINATION Economics Total marks 100 Section I Pages 2 8 General Instructions Reading time 5 minutes Working time 3 hours Write using black or blue pen Black pen is preferred

More information