Chapter 10: Financial Markets and Real GDP

Supply and Demand for Loanable Funds

The market for loanable funds determines the equilibrium interest rate and the quantity of funds lent and borrowed. The supply curve represents savings, while the demand curve represents investment.

• Shifts in Supply Curve: Changes in income, fiscal policy, or consumer confidence can shift the supply of loanable funds.

• Shifts in Demand Curve: Changes in expected profitability of investment, government borrowing, or technological innovation can shift the demand for loanable funds.

• Example: An increase in government deficit increases demand for loanable funds, raising interest rates.

Calculating Growth Rates and the Rule of 70

Growth rates measure the percentage change in a variable over time, commonly used for GDP.

• Formula for Growth Rate:

• Rule of 70: Estimates the number of years required for a variable to double, given its annual growth rate.

• Example: If GDP grows at 2% per year, it will double in approximately 35 years.

Chapter 11: Economic Growth and Technological Change

Determinants of Long-Run Economic Growth

Long-run growth is driven by increases in capital, labor, and technology.

• Key Determinants: Physical capital, human capital, technological progress, and institutional factors.

• Movement vs. Shift: Movement along the per-worker production function is caused by changes in input quantity; shifts are caused by technological change.

Technological Change and New Growth Theory

Technological change increases productivity and is central to new growth theory.

• Components: Innovation, research and development, education.

• Policies: Subsidies for R&D, education funding, intellectual property protection.

• Example: Romer's new growth theory emphasizes endogenous technological change.

Convergence Theory

Convergence theory predicts that poorer economies will grow faster than richer ones, eventually catching up.

• Failures in Low-Income Countries: Poor institutions, lack of infrastructure, low investment.

• Policies: Institutional reform, investment in education and health, foreign aid.

Chapter 12: Aggregate Expenditure Model

Components of Aggregate Expenditure

The aggregate expenditure model explains short-run fluctuations in GDP.

• Components: Consumption (C), Investment (I), Government Spending (G), Net Exports (NX).

• Macroeconomic Equilibrium: Occurs when aggregate expenditure equals output (GDP).

Consumption Function, MPC, and MPS

The consumption function relates consumption to disposable income.

• Consumption Function: where is autonomous consumption, is marginal propensity to consume (MPC), and is disposable income.

• MPC: Fraction of additional income spent on consumption.

• MPS: Fraction of additional income saved.

Investment, Government Spending, and Net Exports

• Representation: Each component is added to aggregate expenditure to determine equilibrium.

Graphing Macroeconomic Equilibrium

• Equilibrium Point: Where AE curve intersects the 45-degree line (output = expenditure).

• Disequilibrium: Points where planned expenditure does not equal output.

Numerical Solutions and the Multiplier

• Multiplier: Measures the change in equilibrium output from a change in autonomous expenditure.

• Example: If , multiplier is 5.

Chapter 13: Aggregate Demand and Aggregate Supply Model

Aggregate Demand Curve

The aggregate demand (AD) curve shows the relationship between the price level and the quantity of real GDP demanded.

• Negative Slope: Due to wealth effect, interest rate effect, and international trade effect.

• Movements vs. Shifts: Movement is caused by changes in price level; shifts are caused by changes in components of AD (C, I, G, NX).

Short-Run Aggregate Supply (SRAS)

The SRAS curve shows the relationship between the price level and the quantity of goods and services firms are willing to produce in the short run.

• Positive Slope: Due to sticky wages and prices, and misperceptions about relative prices.

• Movements vs. Shifts: Movement is caused by changes in price level; shifts are caused by changes in input prices, technology, or expectations.

Long-Run Aggregate Supply (LRAS)

The LRAS curve is vertical, indicating that in the long run, output is determined by resources and technology, not the price level.

• Vertical Line: Represents potential GDP.

• Movements vs. Shifts: Movement is not possible; shifts occur due to changes in resources or technology.

Macroeconomic Equilibrium in the AD-AS Model

• Short-Run Equilibrium: Intersection of AD and SRAS curves.

• Long-Run Changes: Shifts in AD or AS can cause expansions or recessions.

• Graphing: Expansion is shown by a rightward shift of AD or AS; recession by a leftward shift.

Appendix: Solving for Macroeconomic Equilibrium Numerically

• Method: Set aggregate expenditure equal to output and solve for equilibrium GDP.

• Example: If , equilibrium occurs where .