To the instructor: This is a particularly important chapter for your students to master. Many subsequent chapters in this book develop models that incorporate the material in this chapter and build on it. Your students should know at the outset that the time they invest mastering this chapter will yield returns throughout the semester by making subsequent material much easier to learn. Also: This PowerPoint presentation introduces some notation that will be used throughout the remaining chapters. In particular, the use of to denote the change in a variable, and the use of arrows as shorthand for increase, decrease, and causality. The slides that introduce this notation have accompanying notes for the instructor (in the same place as the notes you are reading now). I’ve included several in-class exercises to break up the lecture and to provide immediate reinforcement of the concepts. If you wish, you can “hide” them from your presentation, perhaps assigning them as homework exercises. Near the end of the chapter, there are two hidden slides showing how the loanable funds model is different when saving depends on the real interest rate.
CHAPTER THREE National Income: Where it Comes From and Where it Goes
According to our model, both policies reduce national saving:
1. The Reagan deficits , cont. I 1 2. …which causes the real interest rate to rise… I 2 3. …which reduces the level of investment. 1. The increase in the deficit reduces saving… r S, I I ( r ) r 1 r 2