Economics Notes: Small and Open Economies, Growth, Aggregate Supply and Demand

926 WordsMay 16, 20144 Pages
Production and growth : In the long run, the higher saving rate leads to a higher level of productivty and income, but not to higher growth in these variables. Catch-up effect : Countries that start off poor tend to grow more rapidly than countries that start off rich Y=C+I+G S=I S=(Y-T-C) + (T-G) = private saving – public saving. Because a high interest rate makes borrowing more expensive, the quantity of loanable funds demanded falls as the interest rate rises. The supply and demand for loanable funds depend on the real interest rate and not nominal. Increase in saving = shift the supply of loanable funds to the right = reduces the interest rate. (graphique page 181) Increase in investment = demand for…show more content…
Appreciation in the dollar tends to reduce net exports, offsetting the direct effect of the import quota on the trade balance. Effects of capital flight (large and sudden reduction of the demand of assets located in a country) : Mexico is judged to be a dangerous place = risk premium. Supply goes upward and NCO increases. NCO increases = more money supply of pesos = less valuable compared with other currencies. Aggregate supply and demand Interest rate effect : lower price level = lower interest rate = encourages spending and investment = more good and services consumed Wealth effect: lower price level = dollars in pocket more valuable Real exchange rate : lower price level= depreciated CAD = more exports = more goods and services consumed Therefore, a decrease in price level in creases the quantity of goods and services demanded. How the aggregate demand shifts : Changes in Consumption : any event that changes how much people want to consume at a given price level shifts the aggregate demand curve. When the government cuts taces, people spend more, aggregate demand curve shifts to the right. When the Government raises taxes, people cut back on their spending and the aggregate demand curve shifts to the left. Changes in investment : Less investment = goods and services demanded decrease. Also, an increase in money supply increases interest rate in the short run, making borrowing less costly which stimulates investment spending. Governmnent
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