Principles of Macroeconomics 2e Chapter 7: Components of Economic Growth
Principles of Macroeconomics 2e Chapter 18: Fiscal Policy, Investment, and Economic Growth
Principles of Macroeconomics Chapter 13: The Aggregate Expenditures Model
Macroeconomics: Theory Through Applications
The Single Person Economy
Physical Capital in the Aggregate Production Function
The Cost of Deficits
The Credit (Loan) Market
Budget Deficits and Interest Rates: What Is the Link?
Effective Federal Funds Rate
Federal Surplus or Deficit
A classroom game to teach the principles of money and banking
Savings and Investment in a Closed Economy: Course Map & Recommended Resources
The presentation suggested by this topic is not universally used, but is an option. The objectives assume a closed economy with no flow of goods, services, or investment. Availability of quality material using this approach is limited with the OER materials available, and may require additional resource creation in the future.
- Discuss the role of the financial system in facilitating long run economic growth (13)
Explain the relationship between savings and investment in a closed economy (5)
Utilize the loanable funds model to show how savers are matched with borrowers
Utilize the loanable funds model to explain changes in market interest rates (5,6)
Explain crowding out and how governments influence financial markets (5,9)
Discuss inventory as a form of investment, a signal to firms to change production (5,8)
NOTE: This Module meets Ohio TAG's 5, 6, 8, 9, 13 for an Intro to Macroeconomics Course
Recommended Textbook Resources
Principles of Macroeconomics 2e. OpenStax CNX. Jun 4, 2018.
- Chapter 4, pages 92-98, covers loanable funds and changes in market interest rates.
- Chapter 7, pages 174-178, covers the role of the financial system as a necessary component for economic growth to occur.
- Additional resources will be mentioned below for LO 2 on savings and investment in a closed economy.
- Chapter 18, pages 444-449, covers the topic of crowding out. It treats government borrowing as an increase in demand for loanable funds. An alternative is to consider it as a decrease in supply.
Principles of Macroeconomics by University of Minnesota.
Principles of Macroeconomics by University of Minnesota is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License, except where otherwise noted.
- Page numbers: Chapter 13, specifically page 448, covers inventory as a form of investment. This is more thoroughly covered in the Aggregate Expenditures chapter, and it is recommended that you refer to that chapter.
- Important Notes for the instructor regarding this chapter: The preferred texts for this course do not cover the objectives in a linear or complete fashion. Please see supplemental content/Alternative resources below for other options.
Supplemental Content/Alternative Resources
For additional coverage on these objectives, refer to: Macroeconomics: Theory Through Applications
- In particular, The Single Person Economy covers savings and investment in a closed economy;
- Physical Capital in the Aggregate Production Function covers the financial sector’s role in growth;
- The Cost of Deficits covers crowding out;
- The Credit (Loan) Market covers the loanable funds market.
This text was adapted by Saylor Academy under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensor.
Saylor Academy would like to thank Andy Schmitz for his work in maintaining and improving the HTML versions of these textbooks. This textbook is adapted from his HTML version, and his project can be found here.
How to cite this work:
Publisher: Saylor Academy
Year Published: 2012
As a data exercise, the issue of crowding out can be examined. While it is discussed from a theoretical perspective, an examination of interest rates and government budget deficits might indicate something different.
Ask students to create a graph of interest rates to the government budget deficit (or surplus). Theoretically, the interest rate should increase when the deficit increases, and decrease when the deficit decreases, or a surplus is attained. We would expect there to be a lag between increases in the deficit and the impact on interest rates. When deficit spending increases, is there a lagged response in interest rates?
- The following link discusses the evidence: Budget Deficits and Interest Rates: What Is the Link?
- For interest rate data, the following link provides access to FRED data for the federal funds rate: Effective Federal Funds Rate
- For government budget data, the following link provides acces to FRED data for the federal surplus or deficit: Federal Surplus or Deficit
What does the result suggest? Does an increase in the government budget deficit tend to lead to an increase in interest rates? What other factors might influence interest rates?
Active Learning Exercise
The following link provides information on an educational game to demonstrate the loanable funds model, with a possible extension using the Federal Reserve’s discount window: A classroom game to teach the principles of money and banking
This game has a creative commons license:
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