Chapter 10 Summary

Chapter 10 Summary - Chapter 10 Summary - Investment in...

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Chapter 10 Summary - Investment in physical capital is necessary for long-run economic growth. So in order for an economy to grow, it must channel savings into investment spending. - According to the savings-investment spending identity, savings and investment spending are always equal for the economy as a whole. The government is a source of savings when it runs a positive budget balance, also known as a budget surplus; it is a source of dissavings when it runs a negative budget balance, also known as a budget deficit. In a closed economy, savings is equal to national savings, the sum of private savings plus the budget balance. In an open economy, savings is equal to national savings plus capital inflow of foreign savings. When a capital outflow, or negative capital inflow, occurs, some portion of national savings is funding investment spending in other countries - The hypothetical loanable funds market shows how loans from savers are allocated among borrowers with investment spending projects. In equilibrium, only those projects with a rate of return greater than or equal to the equilibrium interest rate will be funded. By showing how gains from trade between lenders and borrowers are maximized, the loanable funds market shows why a well-functioning financial system leads to a great long-run economic growth. Government budget deficits can raise the interest rate and can lead to crowding out of investment spending. Changes in perceived business opportunities and in
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Chapter 10 Summary - Chapter 10 Summary - Investment in...

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