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Lecture 8: Finishing Up the
Spending Allocation Model
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View Full Document We can also show that the
determination of R in our spending
allocation model is equivalent to
determining R in the framework of
saving and investment.
This is of some interest because saving represents
the resources available for investment.
Also, the resulting graphs look a lot like supply
and demand curves, bringing us back to earlier
lectures.
So it demonstrates the factors that determine R in
another—perhaps more intuitive—way.
Firms
Rest of
the
World
Gov’t
Consume
rs
Financial
Market
Saving
C
G
I
X
The “Circular
Flow” and
Saving
Surplus
Deficit
Trade
Surplus
Trade
Deficit
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View Full Document To see the relationship between the
national saving rate and the interest
rate, we can rewrite the spending
equation . . . . . .
Y = C + I + G + X
Y – C = I + G + X
(Y – C – T) + (T – G)
= I + X
Private
+ Gov’t
= I + X
Saving
Saving
National Saving (S)
= I + X
and dividing by GDP in the
long run
S/Y =
I/Y + X/Y
This is the same as saying C/Y + I/Y + X/Y = 1 – G/Y
You can also determine the equilibrium
real interest rate using the saving rate
relationship.
S/Y is positively related to R
Easiest way to see this is to note that
S/Y = 1 – C/Y – G/Y
When R increases (decreases), G/Y is
unchanged and C/Y falls (rises).
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View Full Document I/Y + X/Y is negatively related to R
I/Y
X/Y
I/Y + X/Y
Something else to note: I/Y + X/Y is the
same as investment financed by
national saving
X = Exports – Imports
When Imports > Exports, we’re running a
trade deficit.
A trade deficit means that we’re
spending more than we’re producing.
The way we spend more than we
produce (or more than our income—
remember production equals income) is
by using foreign saving.
So negative X is
like positive foreign saving.
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This note was uploaded on 03/10/2010 for the course ECON 2 taught by Professor Taylor during the Fall '09 term at Georgetown KY.
 Fall '09
 Taylor
 Macroeconomics, Supply And Demand

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