{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lecture 8

# Lecture 8 - Lecture 8 Finishing Up the Spending Allocation...

This preview shows pages 1–8. Sign up to view the full content.

Lecture 8: Finishing Up the Spending Allocation Model

This preview has intentionally blurred sections. Sign up to view the full version.

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

This preview has intentionally blurred sections. Sign up to view the full version.

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).

This preview has intentionally blurred sections. Sign up to view the full version.

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.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern