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Determining the Economys Output Aggregate Production Function The relationship showing how much total output can be produced with different quantities of labor, with land, capital, and technology held constant
LS
$15
In the labor market, the demand and supply curves intersect to determine employment of 100 million workers.
Determining the Economys Output In the classical long-run view, the economy reaches its potential output automatically.
Circular Flow
Goods and Services Purchased Households Resources Sold $Consumption Spending $Income
Goods Markets
Factor Markets
$Firm Revenues
$Factor Payments
Resources Purchased
Firms
S=YTC
$7 Trillion
Total Output
Total Income
Total Spending
3%
1.5 1.75
Trillions of Dollars
The Demand for Funds Curve Investment Demand Curve When the interest rate falls, investment spending and the business borrowing needed to finance it rise, so the investment demand curve slopes downward.
3%
B Investment Demand
1.0
1.5
Trillions of Dollars
and business firms demand for loanable funds at each interest rate ...
(b) Business Demand for Funds B 5% A
gives us the economys total demand for loanable funds at each interest rate.
(c) Total Demand for Funds B
5%
3%
3%
3%
1.0
1.75
5%
The Loanable Funds Market and Says Law As long as the loanable funds market clears, Says law holds even in a more realistic economy with saving, taxes, investment, and a government deficit.
= 1P + G T
Quantity of funds demanded
7%
I
H
5%
C
D2 = Ip + G2 T D1 = Ip + G1 T
1.75 2.05 2.25
Funds ($Trillions)
5%