Transcript Document

Chapter 4
Analysis of the
Financial System and
the Economy
© 2000 South-Western College Publishing
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Bonds are
•Financial claims on DSUs
•IOUs issued by DSUs
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Disposable Personal
Income
Income available to
households to spend on
consumption or to save
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Financial Statement, J.P. Young, January 1, 1999
through December 31, 1999
Expenditures (Uses)
Consumption
Saving
$34,000
$7,000
(acquisition of
summer home)
$4,000
(acquisition of
financial claims)
$3,000
Consumption plus
Saving
Exhibit 4-1
$41,000
Receipts (Sources)
Wages and
Salaries
$37,000
Dividends
$2,000
Interest
$2,000
Rent
Disposable
Income
$0
$41,000
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Consumption
Household spending
on goods and services
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Financial Statement, All Purpose Enterprise Inc.,
January 1, 1999 through December 31, 1999 (in millions)
$44,000 Total Sales
(A) Total Expenses
$3,200
- Wages and salaries
$200
- Interest on debt
$1,000
- Cost of Raw materials
purchased from other firms
(B) Net Income (Sales Expenses)
- minus dividends
- equals Retained Earnings
$400
(C) Business Investment
Spending (new capital goods,
plant and equipment,and/or
additions to inventories)
$500 Financing:
new bonds issued
Retained earnings
$48,000
$200
$200
$300
$200
$500
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Exhibit 4-2
Investment is
Spending by households
on newly constructed
houses plus spending by
business firms on capital
or additions to inventories
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National Income and Expenditures for Hypothetical
Economy, 1999 (in billions of dollars)
SECTOR
INCOME
HOUSEHOLDS Disposable
personal
ECONOMY
Exhibit 4-3
Retained
earnings
National
income
EXPENDITURES
Consumption
expenditures
$3,400
$4,100
Investment
expenditures
$400
Surplus $300
$200
Investment
expenditures
$500
Deficit –$300
income
BUSINESS
FIRMS
RECEIPTS –
EXPENDITURES
= DEFICIT or
SURPLUS
$4,300
Domestic
Product
$4,300
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Product Market
The market for
consumption spending by
households and
investment spending by
households and firms
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Factor Market
The market for inputs
such as labor, capital, and
natural resources
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National Income
The sum of the
earnings of each sector
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National Expenditures
The sum of the
expenditures of each sector
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Circular Flow Diagram
A diagram that shows the
real and financial flows
between households and
business firms
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Product Markets
$
$
Households
$
Financial Markets
$
Firms
$
$
$
$
Factor Markets
Exhibit 4-4
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Aggregate Supply
The total quantity of
goods and services that
will be supplied at various
prices
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Aggregate Demand
The total quantity of goods
and services that will be
demanded at various prices
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Price
Index
1.0
Product Market: Aggregate Demand &
Aggregate Supply
AS
A
AD
$4,300
Real GDP (in billions)
Exhibit 4-5
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Factor Market: Demand & Supply for Labor
S
Wage
Rate/Hour
$18.50
B
D
200
Labor Hours (in billions)
Exhibit 4-6
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Financial System: Supply & Demand
for Loanable Funds
S
Interest
Rate
(Percent)
C
4
D
$300
Loanable Funds (in billions)
Exhibit 4-7
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Utility is
The satisfaction that
households receive over
time from consuming
goods and services
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Goals of Various Spending Units
Households
Maximize Utility
(Satisfaction)
Firms
Maximize Profits
Exhibit 4.8
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Constrained Maximization
The course of action that
leads to the highest utility
for households or the
greatest profits for firms,
given the constraints that
each faces
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Liquidity Preference
The theory of interest rate
determination based on
the supply and demand
for money; it was first
developed by Keynes
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Stocks are
Quantities that are
measured at
a point in time
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Flows are
Quantities that are
measured
through time
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