ECON 202 FINAL Savings Interest Rates Loanable funds

Where do the funds that finance investment come from?

1. Household saving S 2. Government budget surplus (t-G) 3. Borrowing from the rest of the world (M-X) (1 & 2 together are called National savings)

What is the nations wealth? Savings? How do these things help make rGDP grow?

Wealth- is the value of all the things that people own Saving- is the amount of income that is not paid in taxes or spent on consumption goods and services (savings increases wealth) To make rGDP grow, savings and wealth must be transformed into investment and capital(financial markets)

Demand for loanable funds

Def- is the relationship between the quantity of loanable funds demanded and the real interst rate when all other influenced on borrowing plans remain the same DLF influences- real interest rate & expected profit How it affects- -a rise in the real interest rate decreases the quantity of loanable funds demanded. -a fall in the real interest rate increases the quantity of loanable funds demanded Quantity: The greater the expected profit from new capital, the greater is the amount of investment and the greater the demand for loanable funds

Supply of loanable Funds

Def- is the relationship between the quantity of loanable funds supplied and the real interest rate when all other influenced on lending plans remain the same How it affects: -A rise in real interest rate increases the quantity of loanable funds supplied -A fall in the real interest rate decreases the quantity of loanable funds supplied Changes depends on(to shift)- 1. real interest rate 2.Disposable income 3. Expected future income 4. Wealth 5. Default Risk

Why does the government enter the loanable funds market and what affect does this have interest rates?

Enters when it has a budget surplus or deficit -A government budget surplus increases the supply of funds -A government budget deficit increases the demand for funds. government budget surplus: real interest rate falls government budget deficit: real interest rate rises

Finance vs. Money

Finance- how households and firms obtain and use financial resources and how they cope with the risks that arise in this activity Money- how households and firms use it, how much of it they hold, how much banks create and manage it, and how its quantity influences the economy

Capital gains & Capital loss

Gain- When wealth increases when the market rises Loss- decreases when the market value of assets falls

Define gross & net investment, depreciation, and their implications on capital stock

Gross investment- the total amount spent on purchases of new capital and on replacing depreciated capital Net Investment- is the change in the quantity of capital that results from wear and tear and obsolescence Depreciation- is the decrease in the quantity of capital that results Ex. -they have $30,000 worth of machines (initial capital) -Value of machines fell by 67% ($20,000) now valued at $10,000 (depreciation) -end of year, capital is now $40,000. capital increased by $10,000 (net investment)

Define loanable funds market. How do changes in these things affect the equilibrium interest rate and quantity of loanable funds?

Loanable funds market- The aggregate of all three individual financial markets The loanable funds market is in equilibrium at the real interest rate at which the quantity of loanable funds demanded equals the quantity of loanable funds supplied In each case, what happens to the interest rate and the quantity of loanable funds available? 1.Suppose that expected profits decrease 2.Suppose that expected future income decreases ?????

Physical & financial capital

Physical Capital- The tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services Financial Capital- The funds that firms use to buy physical capital

What is the real interest rate? Nominal interest rate?

Real interest rate- is the nominal interest rate adjusted to remove the effects of inflation on the buying power of money nominal interest rate- is the number of dollars that as borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent