= Y-C-G = I balanced budget = when gvt spends same amount that it collects taxes budget deficit = gvt spends more than it collects taxes T < G+TR Public saving is negativebudget surplus = spends less than it collects taxes Market for loanable funds Demand for loanable funds determined by the willingness of firms to borrowSupply for loanable funds determined by willingness of households to save Equilibrium in the market for loanable funds determines the interest rate and quantity exchanged. Business cycleAlternating periods of expanding and contracting economic activity Expansion= employment / production/ income increaseIt ends with a business cycle peak Following the peak production/employment/income declinerecession it comes to an end with a business cycle trough. Durable goods are expected to last fro 3 years or more years are more affected by business cycle than nondurables.Effect of the business cycle on the inflation rate :Inflation rate decreases during recessions and increases by the end of economic expansions.Effect of the business cycle on the unemployment rate : Unemployment rises during recessions and falls during expansions
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