mankiw7e-chap03.ppt

* * * * * It might be useful to remind students of the meaning of the terms “exogenous” and “transfer payments.” * In the equation for the equilibrium condition, note that the real interest rate is the only variable that doesn’t have a “bar” over it – it’s the only endogenous variable in the equation, and it adjusts to equate the demand and supply in the goods market. When the full slide is showing, before you advance to the next one, you might want to note that the interest rate is important in financial markets as well, so we will next develop a simple model of the financial system. * * * * * After showing definition of private saving, - give the interpretation of the equation: private saving is disposable income minus consumption spending - explain why private saving is part of the supply of loanable funds: Suppose a person earns $50,000/year, pays $10,000 in taxes, and spends $35,000 on goods and services. There’s $5000 remaining. What happens to that $5000? The person might use it to buy stocks or bonds, or she might put it in her savings account or money market deposit account. In all of these cases, this $5000 becomes part of the supply of loanable funds in the financial system. After displaying public saving, explain the equation’s interpretation: public saving is tax revenue minus government spending. Notice the analogy to private saving – both concepts represent income less spending: for the private household, income is (Y-T) and spending is C. For the government, income is T and spending is G. * The Delta notation will be used throughout the text, so it would be very helpful if your students started getting accustomed to it now. If your students have taken a semester of calculus, tell them that ?X is (practically) the same thing as dX (if ?X is small). Furthermore, some basic rules from calculus apply here with ?s: The derivative of a sum is the sum of the derivatives: ?(X+Y) = ?X + ?Y The product rule: ?XY = (