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Unformatted text preview: 2-4-08 Ch. 7 continued - Production function (labor & output) o o o o o The relationship between real GDP and the quantity of labor employed (ceteris paribus) Connect to PPF Work more then GDP increases. It increases fast first, but it slows down later. Increase in labor hour increases in GDP Capital stock:more advanced and more capital can be productive o o Change it production function shifts. The production function shifts up if capital stock increases Output increases then economic growth - Capital stock (needs cash to expand) o o o The total quantity of plant, equipment, building, and business inventories. Our money is what firms are using (bank = intermediate) If country doesn’t money then borrow it pay later. - Market for loan able funds o Market in which households, firms, governments, banks, and other financial institutions borrow and lend. - Nominal interest rate -> >0 o The number of money that a unit of capital earns. - Real interest rate (important one) (that user concerned) o o The quantity of goods and services that a unit of capital earns Real interest rate = nominal interest Rate – Inflation Rate 3% 5% 2% o - Nominal interest rate adjusted for inflation Demand for loanable funds o The relationship between the quantity of loanable funds demanded and the real interest rate (ceteris paribus) o Increase in I.R. = capital is more expansive Check I.R. If I.R. increases then firms borrow less Think of the real interest rate as cost of borrowing As increase I.R. supplier want to lend more. As increase I.R. customers willing to save more money. o Supply and demand choose at the same time More we decide to save I.R. increases and vice versa I.R. adjust to equilibrium is achieved. o ...
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