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CHAPTER 4

CHAPTER 4. Analysis of the Financial System and the Economy. Expenditures (Uses) Receipts (Sources) Consumption $44,000 (spending on goods and services) Wages and salaries $47,000 Saving $ 8,000 Dividends $ 3,000 (acquisition of summer home) $ 5,000

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CHAPTER 4

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  1. CHAPTER 4 Analysis of the Financial System and the Economy

  2. Expenditures (Uses) Receipts (Sources) Consumption $44,000 (spending on goods and services) Wages and salaries $47,000 Saving $ 8,000 Dividends $ 3,000 (acquisition of summer home) $ 5,000 (acquisition of financial claims) $ 3,000 Interest $ 2,000 Consumption plus saving $52,000 Rent $ 0 Disposable income $52,000 Financial Statement of J. P. Young, January 1, 2002 through December 31, 2002

  3. Financial Statement of All Purpose Enterprise Inc., January 1, 2002 through December 2002 (in Millions of Dollars) • (A) Total expenses $ 5,400 Total sales $5,900 • Wages and salaries 5,700 • Interest on debt 200 • Cost of raw materials purchased • from other firms 500 • Net income (sales – expenses) $ 500 • minus dividends 300 • equals retained earnings $ 200 • (C) Business investment spending $ 500 Financing: • Financing: (new capital goods– plant and New bonds issued $300 • equipment—and/or additions to Retained earnings 200 • inventories $500

  4. Income – Expenditures = Deficit or Surplus Surplus $300 Deficit - $300 Sector Households Business firms Economy Income Disposable personal income $5,200 Retained earnings $200 National income $5,400 Expenditures Consumption expenditures $4,400 Investment expenditures $500 Investment expenditures $500 Domestic product $5,400 National Income and Expenditures for Our Hypothetical Economy, 2001 (in Billions of Dollars)

  5. Supply Wages Demand Labor AS Price Index AD Real GDP The Circular Flow Diagram Money Flows from Households to Firms to Pay for Goods and Services PRODUCT MARKETS Products Flow from Firms to Households Surplus Funds Flow from SSUs to DSUs HOUSEHOLDS FINANCIAL MARKETS FIRMS Supply Interest Rate Demand Loanable Funds Labor and Other Factors Flow from Households to Firms FACTOR MARKETS Factor Payments (Wages, etc.) Flow from Firms to Households

  6. Price Index AS 1.0 A AD $5,400 Real GDP (in Billions) The Product Market: Aggregate Demand and Aggregate Supply.

  7. Wage Rate/ Hour S $23.50 B D 200 Labor Hours (in Billions) The Factor Market: The Demand for and Supply of Labor

  8. The Financial System: The Demand for and Supply of Loanable Funds Interest Rate (Percent) S 4 C D $300 Loanable Funds (in Billions)

  9. Goals of Various Spending Units Households Maximize Utility (Satisfaction) Firms Maximize Profits

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