Lecture_8_spring_2009

Lecture_8_spring_2009 - Lecture 8 Econ 2 Stock Market I...

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Lecture 8 Econ 2
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Stock Market I think the S&P 500 index 30 days from now will A) increase by more than 5% B) increase by 1-4% C) won’t change D) decrease by 1-4% E) decrease by more than 5%
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Housing Buying stock Buy: $20 Sell: $30 You make $10
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Housing Short Selling If you think the price of the stock will fall: “Borrow” stock and sell for $30 Buy it back later for $20 You make $10
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Housing For most people housing is the largest asset If prices go up, you win If prices go down, you lose Hedging Short-sell the index for your area
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National Saving and Its Components Private and Public Components of National Saving S public = T - G Includes Federal State Local
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National Saving and Its Components Private and Public Components of National Saving S = ( Y - T - C ) + ( T - G ) National Saving ( S ) is composed of saving by households, businesses, and government (federal, state, and local) Private Public
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National Saving and Its Components Government Budget Deficit The excess of government spending over tax collections ( G - T )
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National Saving and Its Components Government Budget Surplus The excess of government tax collections over government spending ( T - G ) The government budget surplus equals public saving
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National Saving, 1960-2004
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Investment and Capital Formation Investment Investment -- the creation of new capital goods and housing -- is necessary to increase average labor productivity. National saving is the source of funding for investment.
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Investment and Capital Formation Investment Investment spending is undertaken if it is expected to be profitable (i.e., the benefit, or value of marginal product, exceeds the cost of the investment)
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Investment and Capital Formation Why has investment in computers increased by so much in recent decades? Benefits have been increasing over time from diffusion Cost of computing has fallen: Moore’s law
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The number of transistors that can be Inexpensively placed on an integrated circuit Doubles every two years
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Investment in Computers and Software, 1960 - 2004
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Saving, Investment, and Financial Markets Supply of Savings ( S ) The quantity supplied of saving is directly related to the real interest rate r Demand for Saving ( I ) The quantity demanded for saving is inversely related to r .
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Saving, Investment, and Financial Markets Market for Savings The market will determine the equilibrium ( r ). If r is above equilibrium, a surplus of savings will exist. If r is below equilibrium, a shortage of savings will exist.
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The Supply and Demand for Savings Saving and investment Real interest rate (%) Investment I Saving S S, I r
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New Technology Saving and investment Real interest rate (%) I r E S I’ r’ F New Technology Raises the marginal productivity of capital This increases the demand for capital
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Effect of Government Budget Deficit
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This note was uploaded on 11/01/2009 for the course ECON ECON2 taught by Professor Rupert during the Spring '09 term at UCSB.

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Lecture_8_spring_2009 - Lecture 8 Econ 2 Stock Market I...

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