econ24

Announcements and Class Schedule

  • Fall Break: Next week there will be no class or recitation on Tuesday.

  • Options for Tuesday Recitation Students:

    • Option 1: Attend a different recitation on Wednesday or Thursday.

    • Option 2: Attend office hours or homework help sessions. These will be available as usual next week.

    • Option 3: The instructor will attempt to end lecture 30 minutes early next Thursday, allowing you to make up missed quizzes for full credit.

  • Office Hours:

    • Available Wednesday, Thursday, and Friday of week eight. Not available on Tuesday.

    • Exams from Unit One can be picked up in office hours or during the homework help session on Friday.

Week Eight and Nine Overview

  • Content Overview:

    • Week eight is a half week.

    • Week nine contains the Unit Two Exam.

    • Upcoming content includes key macroeconomic variables: Measurement of economic health topics involving GDP, inflation, unemployment, and interest rates.

Key Macroeconomic Variables

Introduction to Interest Rates

  • Importance in Macroeconomics: Money is significant in macroeconomics, referred to as a special price—the interest rate.

  • Interest Rate Determination:

    • Based on the supply and demand model, interest rates operate in a market for money.

Supply and Demand Model for Interest Rates

  • Equilibrium in the Market:

    • Vertical axis: Price (Interest Rate)

    • Horizontal axis: Quantity of Money

    • Demand Increase: Shifts to the right; results in higher interest rates and higher investment.

    • Supply Increase: Shifts to the right; leads to lower interest rates.

  • Connection to Central Bank Monetary Policy: Traditionally, the central bank would increase money supply to control interest rates and influence investment volume.

Recitation Make-up Options

  • If attending a different recitation or office hours does not work, the instructor encourages direct communication.

  • Recitations for other students are as scheduled, with emphasis on completing the week eight recitation quiz.

Introduction to Circular Flow Model

Financial Markets Introduction

  • New Market Addition: The market for goods, services, labor, and now, financial assets (stocks, bonds, loans).

  • Inclusion of Economic Actors:

    • Households, Firms, Government, and Rest of the World.

  • Assumptions:

    • Income equals expenditure; savings occur but do not disappear.

Fundamentals of Interest Rates

Definitions and Market Relations

  • Interest Rate Definition: Price of money.

  • Variability of Interest Rates: Many interest rates exist, influenced closely by the central bank rate. Although there are different rates for various financial products, they generally move together.

  • Market for Loanable Funds:

    • Involves savers and borrowers via banks that help facilitate the lending process.

Supply of Loanable Funds

  • Origin of funds: Primarily from household savings.

  • Supply elasticity: Higher interest rates generally increase the quantity supplied as the opportunity cost of spending rises significantly.

  • Net Capital Inflow: Money from the rest of the world increases the supply available for lending in the U.S.

Demand for Loanable Funds

  • Demand is chiefly driven by investment intentions:

    • Firms require loans for purchasing assets or expanding production capacities.

    • Government demand for loans increases during significant budget deficits.

Effects of Government Borrowing

  • Budget Deficit Impact: Crowds out private investment because the government competes for the same pool of loanable funds, driving rates up.

  • Lender Preferences: Individuals view government loans as safer investments, increasing competition for capital.

Inflation and Interest Rates

Fisher Effect

  • Nominal vs. Real Interest Rates:

    • The nominal interest rate includes expected inflation; thus, real interest rates reflect actual purchasing power post-inflation adjustments.

  • Inflation Impact: Affects saving behavior and borrowing needs, which shifts supply and demand for loanable funds.

Practice Problems: Taxes, Savings, and Investment Calculation

Savings Calculation Framework

  1. Private Savings Formula: Private savings = GDP - Taxes - Consumption.

  2. Public Savings: Revenue - Government spending; indicates surplus or deficit.

  3. National Savings: Combines private and public savings.

  4. Net Capital Inflow: Opposite of net exports.

Practical Calculations on GDP and Investment

Investment Calculation Exercise

  • Calculate private, public, national savings, and net capital inflow, followed by investment assessment based on the methods discussed.

  • For instance, net capital inflow is essential for countries with ongoing trade deficits that influence overall investment levels.

Conclusion and Key Takeaways

  • The interest rate serves as the price for money and adjusts to balance savings and investment levels across the economy.

  • Government actions and economic conditions heavily influence overall economic dynamics regarding interest rates.

  • The factors of inflation and macroeconomic stability remain instrumental in shaping economic decisions related to loanable funds.

Announcements Recap

  • No class or Tuesday recitation during fall break.

  • Recitations available on Wednesday and Thursday before moving into new week content and preparations for upcoming Unit Two Exam.