Econ 011 study guide ex2

# Econ 011 study guide ex2 - Econ 011 Chp 6 9 Chp 6 -...

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Econ 011 Chp 6 – 9 Chp 6 - Measuring national saving o Start from the national income identity to define saving Y = C*+ I + G* + NX Y= total income C= household consumption I= Investment spending G= Government spending NX= net exports = ignored * = current needs o Y – C – G = I = national saving/total saving o (Y – C – T) + (T – G) = I T = taxes = private savings Difference between taxes and gov’t spending = public saving - Positive o T>G = “budget surplus” - Negative o T<G = “budget deficit” - Investment – the creation of new capital goods and housing – it is necessary to increase average labor productivity o National saving is a source of funding for investment o Spending happens if it is expected to be profitable - Should a baker invest in a new oven? o Needs to borrow \$8,000, interest rate = 6% o Expected net revenue = \$1,200 (= rev – maintenance + operation costs) o Tax rate = 20% Alternative = purchase oven at \$8,000, return for 10% (Bonds) - Net exp. Revenue = \$12,00 - Taxes = (20% x \$12,00) = \$2,400 - Opportunity cost = ((1+10%)x\$8,00) = \$8,800 o VMP = \$800 o 6% x \$8,00 = \$480 o VMP > Cost = yes o \$800 > \$\$80 = yes See Annie’s notes for graph - Supply of savings (S) – the quantity supplied of saving is directly related to the real interest rate

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- Demand for Saving (I) – the quantity demand for saving is inversely relate to r o Savings = loanable funds - The market will determine the equilibrium (certain value r ) – if r is above equilibrium, a surplus of savings will exist – if r is below equilibrium, a shortage of savings will exist. - The crowding out effect – the tendency of increased government deficits to reduce investment spending. Chapter 7 - Money is an asset that can be used in making purchases - Money is used for exchange o Use money to purchase goods and services o \$ is used as a unit of account Make sure of economic value – dollar amount o Use \$ to hold wealth - When you have it you don’t spend it right away - M1 o Readily be transformed into cash or coins, ready to be used, very liqudable - M2 o Everything in M1 and more this that are less liquid - M3 o M2 and more things that are less accessible - M4 o M3 and more things that are less liquid - M = CU + Σ D - M = money CU = currency ΣD = Sum of deposits - Fractional reserve banking system o Banks pick up a fraction of the savings and put it in reserves - Bank Reserves – cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments o 10% reserve-deposit ratio = 1 dollar in reserve can support 10 dollars in deposit Commercial Bank One A L R = 100,000 D(initial) = \$1,000,000 L = 900,000 Commercial Bank Two R = \$90,000 D = 900,000 L = 810,000 Commercial Bank Three R = \$81,000 D = \$810,000 L = \$729,00
M= CU +ΣD M= 0 + 1,000,000 + 900,000 + 810,000 + 729,000 M= 1,000,000 (1+90% + (90%)^2 + (90%)^3…) M = 1,000,000/ 1 – 90% = 1,000,000 / 10% = 10,000,000

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## This test prep was uploaded on 04/07/2008 for the course ECON 011 taught by Professor Mathue-booth during the Fall '08 term at Vermont.

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Econ 011 study guide ex2 - Econ 011 Chp 6 9 Chp 6 -...

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