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Terms in this set (16)
define indirect and direct financing
indirect finance is a flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers).
direct finance is a flow of funds from savers to firms through financial markets, such as the NY stock exchange.
the process firms can utilize to raise funds:
If you are making profit, you could reinvest the profit back into the firm. Profits that are reinvested in a firm rather than taken out of the firm and paid to the firm's owners are called retained earnings.
You could raise funds by recruiting additional owners to invest in the firm, increasing the firm's financial capital.
You could borrow the funds from relatives, friends, or a bank.
private and public savings
is equal to what households retain of their income after purchasing goods and services ( C ) and paying taxes (T)
equals the amount of tax revenue the government retains after paying for government purchases and making transfer payments to households:
How is GDP for a closed economy calculated?
net exports will be 0 so Y=C+I+G [GDP=CONSUMPTION+INVESTMENT+GOVERNMENT PURCHASES]
saving and investment equation
this expression says that in a closed economy, investment spending is equal to total income - consumption spending- government purchases
market for loanable funds
the interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged.
The demand for loanable funds is determined by the willingness of firms to borrow to engage in new investment projects. The supply of loanable funds is determined by the willingness of households to save and by the extent of government saving or dissaving.
This leads to a upward sloping supply curve for loanable funds because of the higher the interest rate, the greater the quantity of saving supplied.
refers to a decline in private expenditures as a result of an increase in government purchases.
Most economists and policymakers accept the decisions of the business cycle dating committee of the national bureau of economic research (NBER), who define "a recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade."
define business cycle
alternating periods of economic expansion and economic recession.
descriptions of the cycle during periods of expansion and recession
During the expansion phase of the business cycle, production, employment, and income are increasing.
The period of expansion ends with a business cycle peak.
Following the peak, production employment and income decline as the economy enters the recession phase of the cycle.
Recession comes to an end with a business cycle trough, after which another period of expansion begins.
the effects of the business cycle on inflation rate
The inflation rate usually increases during economic expansions- particularly near the end of an expansion- and the inflation rate usually decreases during recessions.
During a business cycle expansion, spending by businesses and households is strong, and producers of goods and services find it easier to raise prices.This results in an inflation rate of 2.5%.
the effect of the business cycle on unemployment
Recessions cause the inflation rate to fall, but they cause the unemployment rate to rise.
This is typical and is due to two factors:Even though the employment rate begins to increase as a recession ends, it may be increasing more slowly than the increase in the labor force resulting from population growth as people graduate from school or otherwise look for jobs for the first time.Some firms continue to operate well below their capacity even after a recession has ended and sales have begun to increase.
The two factors that determine labor productivity
The quantity of capital per hour worked
The level of technology
Therefore, economic growth occurs if the quantity of capital per hour worked increases and if there is technological change.
the rate of long-run economic growth
increases in real GDP per capita depend on increases in labor productivity.
define potential GDP
the level of real GDP attained when all firms are producing at capacity.
Why did the Industrial Revolution begin in England according to douglass north?
the British Parliament, rather than the king, controlled the government. In 1701, the British court system also became independent of the king. As a result, the British government was credible when it committed to upholding private property rights, protecting wealth, and eliminating arbitrary increases in taxes.
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