ECON 201 1st EditionExam # 2 Study Guide - Business Cycle: alternating periods of economic expansion and economic recession- Long-run economic growth: the process by which rising productivity increases the average standard of living- The best measure of the standard of living is real GDP per person, which is usually referred to as real GDP per capita- To get real GDP use base year- Some low-income countries that have begun to experience economic growth have seen dramaticincreases in life expectancies - In high-income countries, life expectancy at birth is expected to rise from about 80 years today to about 90 years by the middle of the 21st century- Technological advances will continue to reduce the average number of hours worked per day andthe number of years the average person spends in the paid workforce increasing the proportion of leisure time available for “discretionary hours” – the hours remaining after sleeping, eating, and bathing- Calculating growth rates and the rule of 70: (to make GDP double) o Number of years to double: 70/growth rate- Labor productivity determines the role of long-run growth- Labor productivity- the quantity of goods and services that can be produced by one worker or byone hour of work(one hour of work is more commonly used)- Increases in capital, per hour worked and technological change determine the rate of long-run growth- Capital-manufactured goods that are used to produce other goods and services- Technological advance is more important- Productivity increased- doing a lot in less time (ex: we use the plane to get to Alaska now, more time to work)- Productivity decreased- a little in less time(ex: use legs to get to Alaska, less time to work)- Technological change-o Economic growth depends more on technological change than on increases in capital per hour workedThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o Technological change is an increase in the quantity of output firms can produce using a given quantity of inputs- Potential GDP- the level of real GDP attained when all firms are producing at capacity- Potential GDP increases every year as the labor force and the capital stock grow and technological change occurs. During the 3 recessions, since 1989, actual real GDP has been less than potential GDP- Financial system- the system of financial markets and financial intermediaries through which firms acquire funds from households- Without technological advance, capital is useless- We need long-run economic growth to increase our standards. We need to increase our productivity to achieve this- Financial markets- markets where financial securities, such as stocks and bonds, are bought and sold- Financial intermediaries- firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers- The macroeconomics of saving and investment: (will explain more later)o Y=C+I+G+NXo Y=C+I+Go I=Y-C-Go Sprivate=Y+TR-C-To Spublic=T-G-TRo S=Sprivate+Spublic OR S=(Y+TR-C-T) +(T-G-TR) OR S=Y-C-Go So, we can conclude that total savings must equal total investmento S=I- Corruption is very bad for long-run economic growth- 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 money 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- Equilibrium in the market for loanable funds determines the real interest rate and the quantity of loanable funds exchanged- The nominal interest rate is the stated interest rate on a loan- The real interest rate corrects the interest rate for the effect of inflation and is equal to the nominal interest rate minus the inflation rate(nominal interest rate-inflation rate)- Savers provide the funds that are indispensable for the investment spending that economic growth requires, and the only way to save is to not consume- An increase in the demand for loanable funds increases the equilibrium interest rate from one tothe next, and it increases the equilibrium quantity of loanable funds from one to the next. As a result, saving and investment both increase- When the government begins running a budget deficit, the supply of loanable funds shifts to the left- The equilibrium interest rate increases from one to the next, and the equilibrium quantity of loanable funds falls from one to the next. As a result, saving and investment both - Crowding Out – a decline in private expenditures as a result of a increase in government purchases. - Two groups of financial systems: Lenders(households, businesses, government) and borrowers(households, businesses, government). These go through a process including financial intermediaries and direct finance.- Lenders have money and borrowers have the idea- The US has 12 different federal region bank system districts- Main purpose in financial system is to link the lenders and borrowers (federal regional bank  private banks, insurance comps, we use these)- EXPLANATION of earlier Sprivate and Spublic issues:o GDP= Y=C+I(S)+G+NXo If it is a closed economy, no NX  Y=C+I+Go I=Y-C-G (I=investments)o S(saving)private = Y(total household income) + TR(transport payment) – C(household consumption) – T(payment of tax)o S(saving)public = T(Government collect tax revenue) – G(government spending) – TR(transport payment to household)o S(total saving)= Sprivate + Spublic OR S = (Y+TR-C-T) + (T-G-TR) OR S=Y-C-Go So, we conclude that total saving must equal total investmento S=Io S means total saving- Interest- cost to borrow moneyo Technological change increases the demand for loanable fundso Increasing the equilibrium rateo And increasing the equilibrium quantity of loanable fundso ORo When the government begins running a budget deficit, the supply of loanable funds is reducedo Increasing the equilibrium rateo And decreasing the equilibrium quantity of loanable funds- Real interest rate: nominal interest rate – inflation rateo Ex: Nominal: 10% 5%Inflation: 7% 2%= 3% = 3%Nominal: 10% 5%Inflation: 8% 1%= 2% = 4%Interest rate goes up during expansion Interest rate goes down during recession- If interest is too low, demand is