MACROECONOMICS-CH3
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This chapter discusses the determination of national income and its distribution in a closed economy. It introduces the production function and factors of production, capital and labor. It explains that total output is determined by factor supplies and technology. Factor prices, the wage rate and rental rate, are determined by supply and demand in factor markets. Total income is distributed to factors based on their marginal products. The chapter then covers the components of aggregate demand - consumption, investment, and government spending. It presents the loanable funds market model to show how interest rates adjust to equilibrate saving and investment.
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MACROECONOMICS-CH3
- 1. CHAPTER THREE National Income: Where it Comes From and Where it Goes
- 16. answers:
- 17. The MPL and the production function Y output L labor MPL 1 1 MPL 1 MPL As more labor is added, MPL Slope of the production function equals MPL
- 21. MPL and the demand for labor Each firm hires labor up to the point where MPL = W/P Units of output Units of labor, L MPL, Labor demand Real wage Quantity of labor demanded
- 28. The consumption function C Y – T C ( Y – T ) 1 MPC The slope of the consumption function is the MPC.
- 30. The investment function r I I ( r ) Spending on investment goods is a downward-sloping function of the real interest rate
- 35. Loanable funds demand curve The investment curve is also the demand curve for loanable funds. r I I ( r )
- 40. Answers
- 42. The U.S. Federal Government Budget
- 43. The U.S. Federal Government Debt Fun fact: In the early 1990s, nearly 18 cents of every tax dollar went to pay interest on the debt. (Today it’s about 9 cents.)
- 44. Loanable funds supply curve National saving does not depend on r , so the supply curve is vertical. r S, I
- 45. Loanable funds market equilibrium r S, I I ( r ) Equilibrium real interest rate Equilibrium level of investment
- 50. 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
- 56. An increase in investment demand when saving depends on the interest rate
Editor's Notes
- 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.