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Macro Remote Learning 3-4-25 Exam 3
Class Announcement
Class canceled due to weather; note that the usual exam review process is postponed.
Next class will include returning the exams for student review and discussion.
Chapter 20: Economic Growth, Financial System, and Business Cycles
Business Cycle Overview
Definition: The business cycle refers to alternating periods of economic expansion and recessions.
Historical Context: The U.S. economy, from the 19th century onwards, has experienced alternating phases of increasing production/employment (expansion) and declines (recession).
Graphical Representation: Graphs illustrating the business cycle will be shown later in the presentation.
Irregularity of Cycles: The duration of expansions and recessions varies; not uniform in length or intensity.
Expectation of Improvement: In developed nations (U.S., Western Europe, Japan, etc.), citizens expect a long-term increase in their standard of living.
Real GDP Per Capita
Definition: Real GDP per capita measures the economic output per person adjusted for inflation.
U.S. Ranking: As of recent data, the U.S. stands at $74,600 on the real GDP per capita ranking (13th globally).
Comparison with Other Nations:
Luxembourg leads in per capita output.
China ranks lower, at 97th, indicating a lower standard of living despite its total GDP being comparable to the U.S.
Long-run Economic Growth: Defined as the increase in average living standards due to rising productivity.
Growth Rates and Calculation
Formula for Growth Rate:
Growth Rate = ((New Value - Old Value) / Old Value) x 100
Example Calculation: From real GDP values in 2017 ($51 trillion) and 2018 ($56 trillion) to show how to apply the formula.
Rule of 70: A useful approximation to determine the number of years for an economic indicator to double.
Formula: Years to Double = 70 / Growth Rate (e.g., 70 / 5% = 14 years).
Labor Productivity and Economic Growth
Increases in Labor Productivity: Main drivers for economic growth;
Factors Influencing Labor Productivity:
Capital: Refers to physical capital (machinery) and human capital (skills and education of workers).
Technological Change: Enhances output quality and quantity.
The Financial System and Economic Growth
Role of Financial Intermediaries: Institutions that connect savers and borrowers. Banks lend out small depositors' savings to borrowers, enabling investment.
Importance of Financial Markets: They allow for quick information sharing about the economy's state through prices of securities (stocks, bonds).
Key Services of Financial System:
Risk Sharing: Helps manage individual financial risk through diversified portfolios.
Liquidity: Ability to turn investments into cash quickly.
Information Provision: Prices reflect expectations about future revenues from investments.
GDP Measurement in Closed Economies
GDP Decomposition: GDP (Y) = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (NX);
Closed Economy Assumption: In a closed economy, NX = 0, simplifying GDP to Y = C + I + G.
Private and Public Savings: Definitions and calculations based on household income, consumption, taxes, and government transfer payments.
Total Savings and Investment Relationship: In closed economies, total savings is equal to investment (I = Y - C - G).
Budget Dynamics: Balanced budget vs surplus and deficit explanations.
Market for Loanable Funds
Definition: An aggregate of all financial markets where funds flow from lenders to borrowers; determines interest rates and loan availability.
Supply and Demand: Firms demand funds to invest, while households supply savings.
Equilibrium: Interaction between supply and demand sets the interest rate; shifting demand alters the equilibrium.
Factors Influencing Loanable Funds Demand
Expected Profitability of Capital: Higher profitability increases the demand for funds (shift to the right).
Business Taxation: Lower corporate taxes incentivize borrowing (shift to the right).
Factors Influencing Loanable Funds Supply
Wealth Changes: Increased wealth raises supply (shift to the right); decreased wealth lowers it.
Risk Changes: Decreased risk promotes savings (right shift); increased risk does the opposite.
Liquidity Variations: Increased liquidity encourages more savings (right shift); decreases reduce it.
Information Costs: Lower information costs increase supply; higher costs decrease supply.
Business Cycle Phases
Phases Defined:
Expansion: Increasing economic activity.
Peak: Highest point before recession.
Recession: Decreasing economic performance.
Trough: Lowest point before recovery.
Characterization of Phases:
Expansion: High inflation and low unemployment.
Recession: Low inflation and high unemployment.
Assignment Reminder
Review key concepts and be prepared for exam questions on supply and demand shifts, loanable funds, and economic calculations.
Remember to consider real-life implications of the concepts (e.g., government actions impacting the economy).
Conclusion
Preparedness for the upcoming exam by reviewing noted concepts and textbook materials is essential. Make the most of studying by engaging with these themes.
