9-3-09 - ECONOMICS 100B Professor Martha Olney 9/3/09...

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Unformatted text preview: ECONOMICS 100B Professor Martha Olney 9/3/09 Lecture 3 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE Outline • Today’s Economy • Recession and Recovery We will be finishing our discussion of the “Today’s Economy” handout. Graph: Distribution of Aggregate Spending, 1930-2009 Consumption as a share of GDP has increased since the early 1980s from 60% to 70%. Graph: Unemployment The unemployment rate is currently at 9.5%. The newest unemployment rate will be announced tomorrow. We are expecting another increase for the most recent quarter. Note that unemployment has not been this high since the 1980 recession. Graph: Interest Rates, 1965-2009 The top line is the interest rate for conventional home mortgages. The bottom line is the interest rate for the three-month Treasury Bill rate. Note that long-term rates are usually higher than short-term rates. Investors must be provided a “term premium” in order to tie up their funds in long-term versus short-term investments. You can see that the three-month rate and ten-year treasury rates were fairly close in 2006. However, beginning in 2008, a gap began to open up between these two rates. The three-month rate goes down to zero as a result of monetary policy conducted by the central bank. Economics 100B ASUC Lecture Notes Online: Approved by the UC Board of Regents 9/3/09 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2 We have several different interest rates to think about. The three-month and ten-year interest rates are rates for government borrowing. What interest rate does the Federal Reserve target? It targets the Federal funds rate, the interest rate at which banks borrow from each other in order to meet reserve requirements. The current target for the Federal funds rate is 0 to 0.25%. You should remember that these rates are all nominal interest rates. We must distinguish between these and real interest rates. Nominal rates are quoted in newspapers and by banks. But economists believe real interest rates are what drive investor behavior. Investment Spending Investment is defined as spending by businesses for machinery, construction, or changes in the value of inventory holdings. Let’s imagine a business faced with the decision of purchasing new machinery. Profit maximization is the goal of every business. A business deciding whether or not to purchase a machine will compare the expected rate of return of buying and using a machine to prevailing interest rates....
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This note was uploaded on 02/04/2011 for the course ECON 100B taught by Professor Wood during the Fall '08 term at University of California, Berkeley.

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9-3-09 - ECONOMICS 100B Professor Martha Olney 9/3/09...

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