Inflation
When prices of one good rise, consumers buy more of a cheaper substitute.
What is substitution bias?
A market where savers supply funds for loans to borrowers.
What is the loanable funds market?
A formal IOU where a borrower promises to pay a fixed amount in the future.
What is a bond?
GDP divided by population, indicating average living standards
What is per capita GDP?
Rules, laws, and norms that shape economic behavior and incentives.
What are institutions?
The increased cost of time and resources spent to avoid holding money due to inflation.
What is the shoe-leather cost of inflation?
The key sources of funds for borrowers in the loanable funds market.
What are banks, bonds, stocks, mutual funds.
They have an inverse relationship: as bond prices rise, interest rates fall.
What is the relationship between bond prices and interest rates?
According to the Rule of 70, how long does it take for an economy to double in size with a 5% growth rate?
14 years (70/5 = 14).
These give individuals the incentive to invest, innovate, and produce efficiently.
What are property rights?
Borrowers benefit, lenders lose, since the money repaid has less purchasing power.
How does unexpected inflation affect borrowers and lenders?
Changes in income and wealth affect the supply of loanable funds in this way.
More disposable income increases savings, raising the supply of loanable funds
A market where previously issued securities are traded (e.g., NYSE, NASDAQ).
What is a secondary market?
What are the three key resources for economic growth?
Natural resources, human capital, and physical capital.
This protects against uncertainty, encourages investment, while allowing for long-term planning and growth.
What is political stability
When people mistake nominal wage increases for real wage increases.
What is money illusion?
The relationship between saving, borrowing, and investment
Every dollar borrowed must be a dollar saved; savings fund investments, boosting GDP.
A combination of multiple mortgage loans bundled together and sold as securities.
What are mortgage-backed securities?
They provide stability, property rights, and incentives for investment.
What are institutions?
These markets promote efficiency, innovation, and lower consumer prices.
What are competitive markets?
Producers may mistake rising prices as increased demand and overproduce.
What is price confusion?
How does government borrowing impact the loanable funds market?
Increases demand for funds, possibly raising interest rates and crowding out private investment.
How does securitization benefit both lenders and borrowers?
Lenders gain liquidity and risk diversification; borrowers get lower interest rates.
How does technological advancement promote economic growth?
What is efficiency?
It allows countries to specialize, increasing productivity and access to goods and services.
What is international trade?