HOOct20 - Economics 201 Witte Thursday I extended the Aplia...

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Economics 201, Witte, Thursday, October 20, 2005 I extended the Aplia part of last week’s quiz until tonight. Get it done! TA sections: We will be returning your exams, so go, even though there is no quiz this week. I will be in Andersen 311 on Monday from 3-5 PM if you’d like to come talk about your exam with me. If you’re interested in Alternative Student Break (ASB), contact asb@northwestern.edu by TOMORROW! Do be sure you’ve picked up Krugman & Wells volume II from me. Investment: LR Growth and SR Fluctuations I. Long Run growth – A strong level of Investment Demand is essential. a. LR AS will move to the right over time as a country gains workers, technology, and capital stock (the amount of factories, productive machinery, housing, and improved land) b. The capital stock grows if investment (new and replacement capital) is greater than the deprecation of the old capital stock. c. For real GDP per person to grow, we need the capital stock plus technology to grow faster than population growth. II. Short Run fluctuations a. Investment Demand is highly variable b. Most volatile part of Aggregate Demand (C+Id+G+(X-Im)) c. Contributes to recessions and economic expansions Macro Equilibrium I. In Macro Equilibrium, the following must hold: a. Production = Spending (like in “circle flow” diagrams) b. AS = AD c. Y = C + Id + G + (X-Im) i. (Now, subtract (C + T) from both sides of the above.) d. (Y-T)-C = Id + (G-T) + (X-Im) i. Savings = (Y-T) - C = Disposable Income – C e. S = Id + (G-T) + (X-Im) f. Id = S + (T-G) + (Im-X) = S + (Government Surplus) + (International Capital Flows) i. Investment is financed by private savings, government surpluses, and trade deficits (which represent foreigners investing in the US) ii. Government deficits (G>T) use of private savings that could otherwise have gone to finance investment. g. S + T + X = Id + G + X i. Leakages = Injections II. If we are not in macro equilibrium: a. AS does not equal AD b. Leakages to not equal Injections c. If AS > AD i. Leakages > Injections ii. Production > Spending iii. Inventories will rise, and firms will respond by cutting back production d. If AS < AD i. Leakages < Injections ii. Production < Spending iii. Inventories will fall, and firms will respond by raising production Financing Investment I. Imagine a simple world with no government or foreigners. a. In equilibrium, Y = C + Id, S = Id. b. Malthus feared that savings would be too big so that we would not have equibrium.
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c. Ricardo said, “Fear not, if savings is big, then the price of savings, the interest rate, will be low, and this will encourage investment demand to grow.” d. Price for funds is the interest rate (for now we can ignore real versus nominal issues) i. Rate of Return = r
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This note was uploaded on 01/14/2012 for the course ECON 201 taught by Professor Witte during the Spring '08 term at Northwestern.

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HOOct20 - Economics 201 Witte Thursday I extended the Aplia...

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