2.Productivity: TFP curvea.Positive but decreasing slope: diminishing returns to physical capitalb.Increase in physical capital causes movement along the curvec.Increase in technology or human capital causes upward shift of the curve3.Convergence hypothesisChapter 10: Savings, Investment Spending and the Financial System1.Budget Balance (same as Government Savings) = Taxes – Transfers – Government Purchases (G)a.Positive budget balance = budget surplusb.Negative budget balance = budget deficit2.Private Savings = GDP + Transfers – Taxes – Consumption3.National Savings = Private Savings + Budget Balance4.Investment Spending = Private Savings + Budget Balance + Capital Inflowa.Capital Inflow = Imports – Exportsb.Closed economy (no trade): IM=0, X=0, so Capital Inflow = 0c.Open economy (with trade): there are IM and X, so Capital Inflow is not zero5.Loanable Funds Marketa.Borrowers represent demand
b.Savers represent supplyc.On the Y-axis: Interest rate = price of loanable fundsd.On the X axis: quantity of loanable funds ($)6.Crowding out: when persistent budget deficits make the government borrow money, this leads to an increase in the demand for loanable funds, thus driving up interest rate, and “crowding out” (decreasing) investment spending in the country (as businesses don’t want to borrow money at such high interest rates)7.Household wealth:a.financial assets: stocks, bondsb.physical assetsc.What is an asset? What is a liability?d.Liquid vs illiquid assetse.Diversification / securitization8.Financial intermediaries: banks, mutual funds, life insurance companies9.Efficient market hypothesis: belief that asset prices follow a “random walk” (are unpredictable)Chapter 11:1.MPC and MPS, how to calculate multiplier2.Consumption function: constant (autonomous consumption), slope (MPC), aggregate consumption (C)3.Factors that shift consumption function4.Planned Investment Spending: factors that affect it; Accelerator principle5.Unplanned investment spending (inventories)6.Aggregate Expenditure function: factors that shift AE7.Keynesian cross:a.Why is there a 45-degree line?b.Equilibrium GDP – where AEplanned crosses the 45-degree linec.If actual GDP is lower than potential – this means falling inventories, negative unplanned investment spending, growing economy, so firms will increase productiond.If actual GDP is higher than potential – this means rising inventories, positive unplanned investment spending, slowing economy, and firms will decrease production
Chapter 12:1.Aggregate demanda.downward-sloping, due to: interest rate effect (what is it?) and wealth effect (what is it?)b.Factors that shift AD curve: positive and negative demand shocks2.Short Run Aggregate Supplya.upward-sloping, because nominal wages are stickyb.Factors that shift SRAS curve: positive and negative supply shocks3.Long-Run Aggregate Supplya.vertical, because in the long run all prices are flexible, and price level has no effect on potential outputb.Long-run Macroeconomic Equilibrium4.Recessionary Gap: know how to calculate5.
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