Aggregate Demand
This model is built on supply and demand principles but considers the demand and supply of all final goods in an economy.
What is the Aggregate Demand and Aggregate Supply model?
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?
This effect explains why a rise in the price level reduces the purchasing power of wealth, leading to lower consumption.
What is the wealth effect?
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?
This component of aggregate demand includes business spending on capital goods and is influenced by investor confidence and interest rates.
What is investment?
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
This term describes a period long enough for all prices, including wages and contracts, to fully adjust.
What is the long run?
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?
A sudden increase in oil prices that disrupts production is an example of this event, which shifts short-run aggregate supply left.
What is a supply shock?
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?