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If the inflation rate falls below the expected inflation rate, the unemployment rate increases -Long-run Philips curve –shows the relationship between inflation and unemployment when the actual inflation rate equals the expected inflation rate (vertical at natural unemployment rate)-SRPC intersects LRPC at the expected inflation rate -A change in the natural unemployment rate shifts both the LRPCand SRPC-If expected inflation falls from 10 percent to 6 percent a year, SRPCshifts downward to cut LRPCat 6 percent a year
Chapter 23 Capital: -Physical –produced in the past and are used today to produce goods and services. Tools, instruments, machines, buildings, etc.-Financial capital –the funds firms use to buy physical capitalGross investment –total amount spent on purchases of new capital and on replacing depreciated capital Depreciation –the decrease in the quantity of capital that results in wear and tear and obsolescence New investment –change in the quantity of capital Net investment = Gross investment –Depreciation Wealth –the value of all things that people own Wealth increase when market value of assets rises (capital gain) and decreases when market value of assets falls (capital loss) Saving –the amount of income that is not paid in taxes or spent on consumption goods and services Saving increases wealth Saving is the sources of funds used to finance investments in these 3 financial markets: -Loan market -Bond market -Stock market Financial Institution –a firm that operates on both sides of the market for financial capital (borrower and lender). Key financial institutions are: -Investment banks -Commercial banks -Government-sponsored mortgage lenders -Pension funds -Insurance companies Net worth –total market value of what a financial institution has lent minus the market value of what is has borrowed If positive, institution is solvent and if negative, it is insolvent and goes out of business Interest rate on a financial asset - interest received as a percentage of the price of the asset