The Bill of Rights: an introduction

WEBVTT
Kind: captions
Language: en

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- [Tutor] The Bill of
Rights, as we know it today

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were the first 10 amendments
to the Constitution

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and these amendments
guaranteed individual liberty

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to make sure that citizens
had stated expectation

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for what the government
could or could not do to them

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and you can kind of see here
in many of these rights,

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the legacy of the Revolutionary War

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and the kinds of government abuses,

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that citizens in the Colonies had feared.

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Now I'm going to go
over these very quickly,

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we'll spend a lot more
time in other videos

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talking more about these amendments,

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but I wanna give you an overall sense

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of what they're driving at.

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Now the first four amendments

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guarantee individual liberties,

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these are freedom of religion,
speech, press, assembly,

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freedom to ask the government
for redress of grievances

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or to deal with a problem,

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that the government may
have caused in your life,

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the right to bear arms
and assemble militias,

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state and local militias had
made the Revolutionary War

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a success for the United States,

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a ban on quartering soldiers in homes,

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recall that the Quartering Act,

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when the British government
said that the Colonies

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had to put up soldiers in their homes

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was a major driver of revolution

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and a ban on unreasonable
search and seizure,

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that is it would be necessary

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for the government to get a warrant

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to enter your home or to
search your belongings.

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The next four amendments
in the Bill of Rights

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deal with protections for
people accused of crimes

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and again, you see the legacy
of the Revolutionary War

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and the idea that the Crown

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had had too much power
to persecute individuals,

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so this includes things like
the right to due process,

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that is to make sure that all the steps

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of following the law are taken,

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a ban on being tried
twice for the same crime,

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rights to a speedy and public trial,

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a jury of your peers, to
even have a jury in cases,

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that don't have to do with violent crimes,

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but rather civil disputes

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and a ban on excessive bail

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and cruel and unusual punishment,

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basically this is a guarantee

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that the government will respect
the rights of individuals.

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Now, one of the arguments made against

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including a Bill of
Rights in the Constitution

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was that listing out those rights

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might then mean that
they were the only rights

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and that by listing out
these rights in particular,

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they might be forfeiting
their liberties in other ways,

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so the ninth and tenth amendments

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attempt to deal with that worry,

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they say in the ninth amendment,

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any right that isn't listed here

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is still retained by the people,

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so this is not an exhaustive list,

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this is not the complete list

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of all the rights retained by the people

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and the tenth amendment
is slightly different,

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but kind of on the same line,

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they say that if this Constitution
has not delegated a right

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directly to the federal government,

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then that right is reserved
to the states or the people,

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so the federal government can only do

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the things that are listed
in this Constitution,

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it is a limited government,
limited by this document.

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On the other hand, the rights
of the people are unlimited,

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so if the Constitution doesn't say

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that the federal government can do it,

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that's then a right of
the states or the people.


Understanding economic growth

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Language: en

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- [Instructor] In this
video we're going to talk

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about economic growth,

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and I wanna be very careful here.

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Because depending on the context,

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people, including economists,
might mean different things

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by economic growth.

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In everyday language
when people are talking

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about economic growth,

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they're usually just
talking about an expansion

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in the output of an economy over time.

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So if real GDP is increasing,

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they might consider that
to be economic growth.

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But the context that
we're going to talk about

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in this video,

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and this is one that you
might see in an introductory

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economics class or an AP economics class,

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we aren't just talking about an increase

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in real GDP over time.

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We are talking about an
increase in the full employment

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output over time,
regardless of where we are

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in the economic cycle.

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So keep that in mind as
you watch this video.

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If we're just talking about the increase

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of real GDP, we're gonna
call that an expansion,

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not necessarily economic growth.

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And we're gonna call real GDP decreasing

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as being equal to a contraction.

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When we talk about economic growth,

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we're actually talking

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about the full employment
output increasing.

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And this could happen
somewhat independently

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of where we are in the
actual economic cycle.

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Let's do a little diagram to
make that a little bit clearer.

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So right over here I have plotted real GDP

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of an economy versus time.

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And what you see here in
yellow is how the real GDP

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is fluctuating and it's fluctuating

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around its full employment output.

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Let's pick this time right
over here, call it t sub one.

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So right at this point,

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that is our full employment output.

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Let's call it y sub f sub one.

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But we see that our economy is performing

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above our full employment output.

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We have a positive output gap.

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If we go from that point in time,

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fast forward a little bit to t two.

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So let's go to sub two here.

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Because the y sub f right over here,

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the full employment output
right over here is flat,

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according to this we
would not have experienced

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any economic growth from
t sub one to t sub two,

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even though the real GDP would have grown.

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We would've grown from
this point to this point

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right over here.

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So one way to think about it is,

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we are expanding as long as
this curve is upward sloping,

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but if the full employment
output is not changing,

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we are not experiencing economic growth.

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The times where we actually are
experiencing economic growth

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are times where our full
employment output is changing,

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so let's say from this
time right over there

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to this time right over there.

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And notice, that is
happening, theoretically,

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during a contraction.

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This is a contraction right over here

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where real GDP is actually pulling back.

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But if we knew truly what the
full employment output were

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and were able to plot it like this,

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theoretically we actually are experiencing

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economic growth here,
despite a contraction.

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To appreciate this,

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let's look at other models

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that we have studied in economics.

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So we think about a production
possibilities curve.

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The ones that we typically see

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only have two goods or services.

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A real economy's gonna
be much more complex.

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It would have millions
of goods and services,

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but it's very hard to
draw a million-dimension

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production possibilities curve.

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But what this shows us
is at a snapshot in time,

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what is the full employment output.

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And it shows us the
trade-off between these two

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goods or services.

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Now if we're in a situation
where we're behind

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the production possibilities curve,

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that is a negative output gap,

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and it's possible that over time,

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we go from this negative output gap

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back to the production
possibilities curve.

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That would be an expansion in the economy,

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but by the definition that
we're talking about here,

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which is not what is
typically talked about

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in the news or something like this,

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we would not call that economic growth.

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Economic growth happens when we push out

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the production possibilities curve,

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when we have an increase in
our full employment output.

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So economic growth is maybe through

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some new technology or some more workers

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or resources or just better institutions,

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we're able to push our production
possibilities curve out.

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This is an example of economic,

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economic growth.

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So for example,

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this could be our production
possibilities curve

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at let's say t three

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where this is t sub three right over here,

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and then this is our
production possibilities curve

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at t sub four,

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where this is t sub four right over here,

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where our full employment
output has increased.

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We can also think about the same idea

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using our aggregate demand
or aggregate supply model.

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When we studied that,

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we saw that in the short-run,

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because of say a demand
shock or a supply shock,

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we could be operating
to the left or the right

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of our full employment output,

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creating these positive
or negative output gaps,

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but over time we're going to gravitate

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back to this full employment output.

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And so as long as our
production possibilities curve

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isn't getting pushed out, isn't changing,

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or as long as our long-run
aggregate supply curve

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is not changing,

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according to the definition
that I'm talking about

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in this video, we are not
seeing economic growth.

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The analog for what we
saw in this PPC curve

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is maybe this is the long-run
aggregate supply curve

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at t three,

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but if our economy has more resources,

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maybe more population,
more natural resources,

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better technology, better institutions,

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maybe it's able to produce
more at full employment.

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And in that situation,

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our long-run aggregate
supply curve would shift

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to the right.

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And so this could be our long-run

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aggregate supply curve at time t four.

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So this is full employment
output let's call that sub three.

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This would be full
employment output sub four.

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The big takeaway here is,

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regardless of where we
are in the expansion

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or contraction of our business cycles,

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the economic growth is the
change in that blue line.

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And if we're looking at
the PPC it's a shift out

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of our PPC, of our production
possibilities curve.

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If we're looking at the aggregate demand

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aggregate supply model,

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it is a shift to the right of our long-run

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aggregate supply curve.

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And once again,

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what are the things that can cause that?

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And these are good to know.

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There's a notion of capital.

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Traditionally people have just
thought hey more factories,

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more resources, more land,

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maybe that will push things out,

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and it definitely could.

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But more modern definitions
are thinking human capital.

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Hey if we have a better
educated workforce,

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a more skilled workforce,
that could also matter.

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People also think about
things like technology.

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If we can discover better
ways of putting together

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the resources we have,

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that can also increase our productivity,

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and that's what we would call technology

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in an economics context.

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And things like
institutions matter as well.

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You could imagine if your bureaucracy

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is really slows things down,

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if it takes forever to get
a permit to do something,

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well that might put a hamper on what

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the full employment output is.

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But if the institutions
become much more efficient,

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well then that might allow the country,

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allow that economy, to produce
more at full employment.

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So all of these things
could push out your PPC,

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could push your long-run
aggregate supply curve

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to the right, or cause this blue curve

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which represents your
full employment output

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to move up over time.

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All of that would be economic growth.


Crowding out

WEBVTT
Kind: captions
Language: en

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- [Instructor] In this
video we're gonna use

00:00:01.640 --> 00:00:04.240
a simple model for the
loanable funds market

00:00:04.240 --> 00:00:09.240
to understand a phenomenon
known as crowding out.

00:00:09.550 --> 00:00:11.510
And this is making reference

00:00:11.510 --> 00:00:14.640
to when a government borrows money,

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to some degree it could crowd out

00:00:16.440 --> 00:00:18.940
private sector borrowing and investment,

00:00:18.940 --> 00:00:21.970
and it could have negative
consequences for the economy.

00:00:21.970 --> 00:00:24.310
You might have less
investment as a result,

00:00:24.310 --> 00:00:26.910
and you could have less economic growth.

00:00:26.910 --> 00:00:29.510
So let's see how the
crowding out can happen

00:00:29.510 --> 00:00:32.087
using this loanable funds market.

00:00:32.087 --> 00:00:34.510
So, just to be clear what's going on here,

00:00:34.510 --> 00:00:37.850
horizontal axis, the
quantity of loanable funds.

00:00:37.850 --> 00:00:40.910
The vertical axis, you have
your price of borrowing,

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which is going to be
our real interest rate.

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And our equilibrium real
interest rate and quantity

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is determined by the intersection

00:00:50.460 --> 00:00:53.130
between the supply of loanable funds curve

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and the demands of loanable funds curve.

00:00:55.870 --> 00:00:59.590
So what happens if,
let's just say step one,

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the government decides to borrow

00:01:02.320 --> 00:01:04.830
to fund some of its spending.

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What is going to happen to these curves?

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Is one of them going to shift?

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Well, sure.

00:01:10.390 --> 00:01:11.930
If at any given interest rate,

00:01:11.930 --> 00:01:13.890
all of a sudden you have a big borrower

00:01:13.890 --> 00:01:17.470
in terms of the government
that now wants to enter

00:01:17.470 --> 00:01:19.400
the market for loanable funds,

00:01:19.400 --> 00:01:20.380
at a given interest rate,

00:01:20.380 --> 00:01:23.540
that's going to increase the
demand for loanable funds.

00:01:23.540 --> 00:01:25.200
So the step one right over here

00:01:25.200 --> 00:01:28.570
is going to shift the demand
of loanable funds curve

00:01:28.570 --> 00:01:31.460
to the right, I'll just that
step one right over there.

00:01:31.460 --> 00:01:34.090
And so our new demand for loanable funds

00:01:34.090 --> 00:01:37.860
might look something like this.

00:01:37.860 --> 00:01:42.860
And so let's call this demand
for loanable funds prime.

00:01:43.010 --> 00:01:46.030
So this is going to shift,

00:01:46.030 --> 00:01:51.030
shift the demand for
loanable funds to the right.

00:01:51.190 --> 00:01:53.220
Now, what does that going to cause?

00:01:53.220 --> 00:01:57.420
Well that is going to cause our
real interest rate to go up.

00:01:57.420 --> 00:02:01.900
Real interest, interest rate

00:02:01.900 --> 00:02:02.890
is going to go up.

00:02:02.890 --> 00:02:03.890
You see it right over here.

00:02:03.890 --> 00:02:08.515
Our new equilibrium, you
do have more loanable funds

00:02:08.515 --> 00:02:11.820
that are being supplied and demanded,

00:02:11.820 --> 00:02:13.180
that are being borrowed.

00:02:13.180 --> 00:02:15.220
So this call this Q prime.

00:02:15.220 --> 00:02:18.230
But you see this happening
at a higher cost,

00:02:18.230 --> 00:02:20.120
at a higher real interest rate.

00:02:20.120 --> 00:02:22.281
So we call that R prime.

00:02:22.281 --> 00:02:25.150
Well, what's going to be the
impact in the private sector

00:02:25.150 --> 00:02:27.140
of a higher real interest rate?

00:02:27.140 --> 00:02:28.220
Let's imagine for a second

00:02:28.220 --> 00:02:30.820
this first blue curve was
just the private sector.

00:02:30.820 --> 00:02:33.220
Let's say that the government
just started to borrow

00:02:33.220 --> 00:02:35.470
in this video shifting the curve.

00:02:35.470 --> 00:02:38.700
Well, if the blue curve was
just the private sector,

00:02:38.700 --> 00:02:41.430
at this new interest rate,
the private sector is willing

00:02:41.430 --> 00:02:43.380
to borrow a lot less.

00:02:43.380 --> 00:02:47.980
So we could say, private sector, private

00:02:49.450 --> 00:02:50.283
sector

00:02:51.750 --> 00:02:53.730
borrows less,

00:02:53.730 --> 00:02:55.610
borrows less.

00:02:55.610 --> 00:02:58.010
And so what could that result in?

00:02:58.010 --> 00:02:59.870
Well, then, you could have,

00:02:59.870 --> 00:03:02.670
and this is the negative
effects of crowding out,

00:03:02.670 --> 00:03:05.180
you could have, because
they're borrowing less,

00:03:05.180 --> 00:03:06.610
they're fueling less investment,

00:03:06.610 --> 00:03:07.980
then you're gonna have less capital,

00:03:07.980 --> 00:03:10.220
less productive capital that you can use

00:03:10.220 --> 00:03:12.290
to produce things, so we could say,

00:03:12.290 --> 00:03:14.590
less capital accumulation,

00:03:14.590 --> 00:03:15.973
accumulation.

00:03:17.070 --> 00:03:18.970
Which is just another way
of saying, for example,

00:03:18.970 --> 00:03:20.670
people are investing less,

00:03:20.670 --> 00:03:22.240
because they're not borrowing as much.

00:03:22.240 --> 00:03:24.210
Investing less in factory
or some other thing

00:03:24.210 --> 00:03:26.540
that might make people, or in technology,

00:03:26.540 --> 00:03:28.670
things that might make
them more productive.

00:03:28.670 --> 00:03:31.350
And so if you're having
less capital accumulation,

00:03:31.350 --> 00:03:34.610
that means that you're going
to have slower economic growth.

00:03:34.610 --> 00:03:37.340
One of the ways that a
country really pushes

00:03:37.340 --> 00:03:39.340
its production possibilities curve out

00:03:39.340 --> 00:03:42.490
or really pushes its long
run aggregate supply curve

00:03:42.490 --> 00:03:44.890
to the right and has true economic growth

00:03:44.890 --> 00:03:47.040
is through investment.

00:03:47.040 --> 00:03:49.570
But if you have, if you're
borrowing costs are higher,

00:03:49.570 --> 00:03:50.850
you're gonna have less investment,

00:03:50.850 --> 00:03:54.553
less capital accumulation
and slower economic growth.


Quantity theory of money

WEBVTT
Kind: captions
Language: en

00:00:00.220 --> 00:00:01.620
- [Instructor] In this video,
we're going to talk about

00:00:01.620 --> 00:00:04.060
the quantity theory of
money which is based

00:00:04.060 --> 00:00:06.540
on what is known as the
equation of exchange

00:00:06.540 --> 00:00:10.350
and it tries to relate
the money supply, M,

00:00:10.350 --> 00:00:13.623
so this is some measure
of the money supply,

00:00:14.900 --> 00:00:18.650
with the real GDP, Y,

00:00:18.650 --> 00:00:22.010
so that is real GDP,

00:00:22.010 --> 00:00:26.990
and the price level, P,
so this is price level,

00:00:26.990 --> 00:00:28.920
and we'll try to make
this tangible in a second,

00:00:28.920 --> 00:00:31.240
and then it also introduces this idea

00:00:31.240 --> 00:00:33.870
of the velocity of money

00:00:33.870 --> 00:00:37.110
which is a measure of how
much that money supply

00:00:37.110 --> 00:00:39.070
is how quickly is it circulating.

00:00:39.070 --> 00:00:41.320
If there's a dollar out
there, how many times per year

00:00:41.320 --> 00:00:43.180
is it actually changing hands?

00:00:43.180 --> 00:00:45.540
Velocity of money.

00:00:45.540 --> 00:00:49.040
And the equation of exchange that is used

00:00:49.040 --> 00:00:50.670
in the quantity theory of money

00:00:50.670 --> 00:00:52.890
relates these as following,

00:00:52.890 --> 00:00:55.360
that the money supply

00:00:55.360 --> 00:00:58.700
times the velocity of money

00:00:58.700 --> 00:01:00.060
is equal to

00:01:01.030 --> 00:01:02.610
your price level

00:01:02.610 --> 00:01:04.580
times your real GDP.

00:01:04.580 --> 00:01:07.730
And we can view this on a per year basis.

00:01:07.730 --> 00:01:10.240
So let's make this a little bit tangible.

00:01:10.240 --> 00:01:11.970
And actually, let's
try to make it tangible

00:01:11.970 --> 00:01:13.970
by making velocity tangible.

00:01:13.970 --> 00:01:16.440
Let's say we are in a world where

00:01:16.440 --> 00:01:18.510
we have whatever we're using for M,

00:01:18.510 --> 00:01:20.950
whatever measure of our money supply,

00:01:20.950 --> 00:01:23.580
let's say it says that we have 10 billion,

00:01:23.580 --> 00:01:27.000
it's a relatively small economy,
that is our money supply.

00:01:27.000 --> 00:01:31.720
And let's say that our real
GDP in this economy this year

00:01:31.720 --> 00:01:36.720
is going to be a 100 billion,

00:01:36.880 --> 00:01:39.760
I'll just call it per year,

00:01:39.760 --> 00:01:41.030
and let's say the price level,

00:01:41.030 --> 00:01:45.807
and this is usually some
type of index, this is 1.1

00:01:47.720 --> 00:01:50.320
so one way to think about it,
if you take your price level

00:01:50.320 --> 00:01:53.860
times your real GDP, so
if you take this product

00:01:53.860 --> 00:01:56.750
right over here, that's gonna
give you your nominal GDP

00:02:00.520 --> 00:02:03.080
where if this was 1.0,
that would be in reference

00:02:03.080 --> 00:02:05.760
to some year that you
consider your base year.

00:02:05.760 --> 00:02:09.050
So, this would be your real
GDP in terms of that base year

00:02:09.050 --> 00:02:11.770
and then you would multiply
it times this right over here

00:02:11.770 --> 00:02:14.740
to get your nominal GDP.

00:02:14.740 --> 00:02:17.430
But given this information,
pause this video

00:02:17.430 --> 00:02:20.050
and try to figure out what
the velocity of money would be

00:02:20.050 --> 00:02:21.560
for that year.

00:02:21.560 --> 00:02:23.750
Well, this is relatively
straightforward algebra.

00:02:23.750 --> 00:02:27.150
To solve for V, we just
divide both sides by M

00:02:27.150 --> 00:02:31.650
and we would get that our
velocity of money in this year

00:02:31.650 --> 00:02:36.650
is equal to our price
level times our real GDP

00:02:37.220 --> 00:02:41.290
divided by our amount of money.

00:02:41.290 --> 00:02:44.420
And so, this is going to be equal to,

00:02:44.420 --> 00:02:46.067
we have 1.1

00:02:47.370 --> 00:02:49.763
times 100 billion,

00:02:50.600 --> 00:02:53.763
100 billion dollars per year,

00:02:54.880 --> 00:02:56.993
divided by 10 billion dollars.

00:03:00.310 --> 00:03:02.021
So, what is this going to be?

00:03:02.021 --> 00:03:07.021
1.1 times a 100 is a
110 divided by 10 is 11.

00:03:07.440 --> 00:03:11.700
So we are going to get, this
is going to be equal to 11.

00:03:11.700 --> 00:03:14.080
The dollar units would actually cancel out

00:03:14.080 --> 00:03:15.670
and all you're left with if you tried

00:03:15.670 --> 00:03:20.650
to look at the units is 11 times per year.

00:03:20.650 --> 00:03:22.680
And so, one way of interpreting this

00:03:22.680 --> 00:03:26.390
is for these numbers, your average dollar

00:03:26.390 --> 00:03:29.100
is going to circulate 11 times per year.

00:03:29.100 --> 00:03:32.770
If this idea still seems
too abstract to you,

00:03:32.770 --> 00:03:33.970
think of it this way.

00:03:33.970 --> 00:03:37.620
Let's have an extreme economy
where we only have two parties

00:03:37.620 --> 00:03:42.620
and let's assume that our price
level is just a simple one,

00:03:42.890 --> 00:03:45.100
in which case, our real
GDP would be the same

00:03:45.100 --> 00:03:47.560
as our nominal GDP, and let's say

00:03:47.560 --> 00:03:51.600
that our GDP this year
is 100 billion dollars,

00:03:51.600 --> 00:03:54.110
100 billion dollars per year,

00:03:54.110 --> 00:03:57.590
and let's take an extreme situation where

00:03:57.590 --> 00:03:59.600
the amount of money that we have

00:03:59.600 --> 00:04:02.620
is also 100 billion.

00:04:02.620 --> 00:04:04.280
Well, this would be a world,
if there's only two people

00:04:04.280 --> 00:04:06.410
in this economy, or maybe this person

00:04:06.410 --> 00:04:11.240
just pays that person 100 billion dollars

00:04:11.240 --> 00:04:14.440
in order to get that much worth of output.

00:04:14.440 --> 00:04:17.440
And so, every dollar has
just switched hand once.

00:04:17.440 --> 00:04:19.440
So the velocity of
money in this situation,

00:04:19.440 --> 00:04:22.230
it would be just one time per year.

00:04:22.230 --> 00:04:24.430
But imagine another scenario where

00:04:24.430 --> 00:04:27.840
instead of M being equal
to a 100 billion dollars,

00:04:27.840 --> 00:04:32.633
imagine a situation
where M is equal to $1,

00:04:33.650 --> 00:04:35.300
where there's only $1 there.

00:04:35.300 --> 00:04:38.700
You could still have a
GDP of 100 billion dollars

00:04:38.700 --> 00:04:41.360
because that $1 could just switch hands

00:04:41.360 --> 00:04:43.150
a 100 billion times.

00:04:43.150 --> 00:04:45.260
It would have to happen quite rapidly

00:04:45.260 --> 00:04:46.690
for a dollar happened in the year,

00:04:46.690 --> 00:04:48.150
but this person could buy a dollar's worth

00:04:48.150 --> 00:04:49.450
of goods and services from this person

00:04:49.450 --> 00:04:50.490
and that person buys a dollar's worth

00:04:50.490 --> 00:04:51.570
of goods and services from that person

00:04:51.570 --> 00:04:55.070
and it would go back and
forth 100 billions times.

00:04:55.070 --> 00:04:58.070
And so, in this situation
where you still have

00:04:58.070 --> 00:05:01.280
the same real, and actually nominal, GDP,

00:05:01.280 --> 00:05:05.210
if your amount of money is
one-one hundred billionth,

00:05:05.210 --> 00:05:06.690
then your velocity would have to be

00:05:06.690 --> 00:05:09.360
a 100 billion times higher.

00:05:09.360 --> 00:05:11.560
Now, the folks who like to think about

00:05:11.560 --> 00:05:15.540
this equation of exchange and
the quantity theory of money,

00:05:15.540 --> 00:05:18.593
they're often known as monetarists,

00:05:19.490 --> 00:05:22.940
and monetarists believe that inflation

00:05:22.940 --> 00:05:26.240
is fundamentally a monetary phenomenon,

00:05:26.240 --> 00:05:28.410
that if you increase the money supply,

00:05:28.410 --> 00:05:30.560
that that's going to lead
to increased inflation

00:05:30.560 --> 00:05:32.690
and if you decrease the money supply,

00:05:32.690 --> 00:05:36.860
that might slow inflation
or even result in deflation.

00:05:36.860 --> 00:05:39.640
So if you want to think about
inflation in terms of money,

00:05:39.640 --> 00:05:42.860
we could solve for P from this equation.

00:05:42.860 --> 00:05:45.300
So to solve for P, we would
just divide both sides

00:05:45.300 --> 00:05:48.860
by our real GDP, and so you would get,

00:05:48.860 --> 00:05:53.860
your price level is equal
to the amount of money

00:05:54.260 --> 00:05:55.883
times your velocity,

00:05:58.318 --> 00:06:02.600
divided by real GDP.

00:06:02.600 --> 00:06:05.260
And these monetarists
will assume that velocity

00:06:05.260 --> 00:06:08.100
is constant, although folks theorize

00:06:08.100 --> 00:06:09.515
that maybe it's not constant,

00:06:09.515 --> 00:06:11.960
that technology for example, might make it

00:06:11.960 --> 00:06:13.670
a little bit easier to transact

00:06:13.670 --> 00:06:15.950
which might make velocity increase.

00:06:15.950 --> 00:06:18.680
There could also be a world
where just people's mindsets

00:06:18.680 --> 00:06:20.380
make them wanna transact more or less

00:06:20.380 --> 00:06:21.800
which could change velocity.

00:06:21.800 --> 00:06:24.340
But monetarists tend to
assume that this is constant

00:06:24.340 --> 00:06:27.080
because it frankly allows
you to make conclusions

00:06:27.080 --> 00:06:29.720
from this equation of exchange.

00:06:29.720 --> 00:06:33.710
And monetarists also assume
that changes in the money supply

00:06:33.710 --> 00:06:38.690
will not have an impact on
real output in the long run.

00:06:38.690 --> 00:06:40.860
So, not impacted

00:06:43.337 --> 00:06:47.107
by M in the long-run.

00:06:48.860 --> 00:06:50.530
Well, if you assume that these two things

00:06:50.530 --> 00:06:51.840
are relatively constant,

00:06:51.840 --> 00:06:54.810
well then, you will see
this direct relationship

00:06:54.810 --> 00:06:56.530
between your price level

00:06:56.530 --> 00:06:59.680
and the quantity of money.

00:06:59.680 --> 00:07:01.760
Now in practice, this is likely to be

00:07:01.760 --> 00:07:05.210
an oversimplification like
most of our economics models.

00:07:05.210 --> 00:07:09.820
For example, coming out of the
last recession of 2008-2009,

00:07:09.820 --> 00:07:13.010
the federal reserve
practiced quantitative easing

00:07:13.010 --> 00:07:16.310
where they dramatically
increased the money supply

00:07:16.310 --> 00:07:19.230
right over here, but we
did not see a commensurate

00:07:19.230 --> 00:07:23.440
dramatic increase in
inflation, in the price level.

00:07:23.440 --> 00:07:26.270
Now, some folks could argue
that when the federal reserve

00:07:26.270 --> 00:07:29.640
in 2008 dramatically
increased the money supply

00:07:29.640 --> 00:07:32.490
without a dramatic
increase in price levels,

00:07:32.490 --> 00:07:36.190
it might've been because the
velocity of money went down,

00:07:36.190 --> 00:07:37.910
that people weren't actually transacting

00:07:37.910 --> 00:07:40.740
with all of that money
that was being injected

00:07:40.740 --> 00:07:41.670
into the system.

00:07:41.670 --> 00:07:42.770
Who knows?

00:07:42.770 --> 00:07:44.790
And if you're always able to use velocity

00:07:44.790 --> 00:07:46.790
as a bit of a fudge factor, well then

00:07:46.790 --> 00:07:50.080
it puts into debate of
how useful this might be.

00:07:50.080 --> 00:07:52.860
But needless to say, it
is an interesting model

00:07:52.860 --> 00:07:55.830
to at least think about,
that if the money supply

00:07:55.830 --> 00:07:58.160
were to increase dramatically
and people transact

00:07:58.160 --> 00:08:00.990
at roughly the same rate,
but the actual output

00:08:00.990 --> 00:08:03.280
that the economy is
producing isn't changing,

00:08:03.280 --> 00:08:05.030
it makes some level of common sense

00:08:05.030 --> 00:08:07.560
that maybe that would increase
increase the price level.

00:08:07.560 --> 00:08:10.373
You would have more money
chasing the same output.


Long run and short run Phillips curves

WEBVTT
Kind: captions
Language: en

00:00:00.000 --> 00:00:01.420
- [Tutor] Let's talk a little bit about

00:00:01.420 --> 00:00:04.005
the short run and long run Phillips curve,

00:00:04.005 --> 00:00:06.790
now they're named after the
economist, Bill Phillips,

00:00:06.790 --> 00:00:08.272
who saw in the 1950s

00:00:08.272 --> 00:00:10.960
what looked like an inverse relationship

00:00:10.960 --> 00:00:12.523
between inflation and
the unemployment rate

00:00:12.523 --> 00:00:14.817
and he was studying decades of datasets

00:00:14.817 --> 00:00:16.136
in the United Kingdom,

00:00:16.136 --> 00:00:18.771
where he saw usually when we had high,

00:00:18.771 --> 00:00:22.020
or when the United Kingdom
had high inflation,

00:00:22.020 --> 00:00:24.303
you had relatively low unemployment

00:00:24.303 --> 00:00:26.870
and that tended to be when
the economy was doing well,

00:00:26.870 --> 00:00:28.310
so he would see these data points

00:00:28.310 --> 00:00:30.390
from the different years
and then he would see

00:00:30.390 --> 00:00:32.339
that when there was a
high unemployment rate,

00:00:32.339 --> 00:00:35.060
when the economy was a little bit slower,

00:00:35.060 --> 00:00:37.610
then you had low inflation

00:00:37.610 --> 00:00:40.775
and so he theorized the
existence of a curve,

00:00:40.775 --> 00:00:42.929
that could describe this relationship,

00:00:42.929 --> 00:00:46.250
maybe it looks something like this

00:00:47.570 --> 00:00:50.888
and if we take this model
or if we assume this model,

00:00:50.888 --> 00:00:53.577
then it would hold that
when the economy is strong,

00:00:53.577 --> 00:00:55.534
you have high inflation, low unemployment,

00:00:55.534 --> 00:00:57.180
when the economy is weak,

00:00:57.180 --> 00:01:00.282
you have high unemployment
and low inflation.

00:01:00.282 --> 00:01:02.925
Now you fast forward to the 1970s

00:01:02.925 --> 00:01:05.240
and economists started to see a situation,

00:01:05.240 --> 00:01:09.410
where this broke down, in
the 1970s in particular,

00:01:09.410 --> 00:01:11.859
you saw situations of stagflation,

00:01:11.859 --> 00:01:15.710
where you had both high
unemployment and high inflation,

00:01:15.710 --> 00:01:18.430
so it didn't seem to
fit the Phillips curve

00:01:18.430 --> 00:01:20.370
and so economists theorized that,

00:01:20.370 --> 00:01:23.290
okay, maybe this thing
that Phillips theorized

00:01:23.290 --> 00:01:25.167
is really just what
happens in the short run,

00:01:25.167 --> 00:01:29.720
so they said that this is
the short run Phillips curve,

00:01:29.720 --> 00:01:31.900
but they theorized that there's actually

00:01:31.900 --> 00:01:34.540
a long run Phillips curve as well,

00:01:34.540 --> 00:01:37.340
that describes the natural
rate of unemployment

00:01:37.340 --> 00:01:39.440
or the natural rate of
unemployment you would get,

00:01:39.440 --> 00:01:42.030
when the economy is at full employment

00:01:42.030 --> 00:01:43.670
and remember, full employment doesn't mean

00:01:43.670 --> 00:01:45.280
everyone's employed, it just means

00:01:45.280 --> 00:01:48.520
a sustainable rate of
employment for the country

00:01:48.520 --> 00:01:52.520
and so if we wanted to draw
that long run Phillips curve,

00:01:52.520 --> 00:01:55.430
that economists theorized in the 1970s,

00:01:55.430 --> 00:01:57.405
it might look something like this

00:01:57.405 --> 00:02:00.190
and when you see it as a
vertical line like this,

00:02:00.190 --> 00:02:03.550
let me write this, long
run Phillips curve,

00:02:03.550 --> 00:02:05.285
it shows that over the long run,

00:02:05.285 --> 00:02:07.970
the unemployment rate would
be this value right over here

00:02:07.970 --> 00:02:11.880
irrespective of what's
going on with inflation

00:02:11.880 --> 00:02:13.700
and so let's say for this economy,

00:02:13.700 --> 00:02:18.136
our natural rate of unemployment is 4%

00:02:18.136 --> 00:02:22.510
and we see that it is
associated with 1% inflation

00:02:24.090 --> 00:02:25.210
and so you can imagine,

00:02:25.210 --> 00:02:27.273
if there's some
perturbations to the economy,

00:02:27.273 --> 00:02:30.750
maybe the economy gets
a little bit overheated,

00:02:30.750 --> 00:02:31.850
well then, you could get a little bit

00:02:31.850 --> 00:02:34.740
higher inflation and lower unemployment

00:02:34.740 --> 00:02:36.514
or if the economy slows down a little bit,

00:02:36.514 --> 00:02:39.820
you could have higher
unemployment and lower inflation,

00:02:39.820 --> 00:02:43.970
but it should gravitate back
to the long run Phillips curve.

00:02:43.970 --> 00:02:46.410
But now let's think about this in context

00:02:46.410 --> 00:02:49.081
of our aggregate demand,
aggregate supply model

00:02:49.081 --> 00:02:50.700
and think about a scenario,

00:02:50.700 --> 00:02:53.913
where our short run Phillips
curve could actually shift.

00:02:55.620 --> 00:02:56.903
So here we have our typical axes,

00:02:56.903 --> 00:02:58.230
when we're thinking about

00:02:58.230 --> 00:02:59.960
aggregate demand and aggregate supply,

00:02:59.960 --> 00:03:02.490
we have real GDP on our horizontal axis,

00:03:02.490 --> 00:03:05.460
the price level on our vertical axis

00:03:05.460 --> 00:03:08.490
and so our aggregate demand curve

00:03:08.490 --> 00:03:12.500
might look something like
this, it is downward sloping,

00:03:12.500 --> 00:03:14.910
so let's call that our
aggregate demand curve

00:03:14.910 --> 00:03:19.010
and then our short run
aggregate supply curve

00:03:19.010 --> 00:03:20.853
might look something like this,

00:03:22.490 --> 00:03:25.080
so as price levels go up in the short run,

00:03:25.080 --> 00:03:28.140
people are willing to produce more,

00:03:28.140 --> 00:03:32.220
so this is our short run aggregate supply

00:03:32.220 --> 00:03:33.813
and remember, when we talked about

00:03:33.813 --> 00:03:36.100
aggregate demand and aggregate supply,

00:03:36.100 --> 00:03:39.880
we talked about a notion of
our full employment output,

00:03:39.880 --> 00:03:40.860
which is you could view

00:03:40.860 --> 00:03:44.170
as a sustainable rate
of output for an economy

00:03:44.170 --> 00:03:46.810
and we can draw that as a vertical line,

00:03:46.810 --> 00:03:49.120
so this right over here

00:03:49.120 --> 00:03:53.100
would be our long run

00:03:53.100 --> 00:03:54.733
aggregate supply

00:03:54.733 --> 00:03:58.010
and where it intersects our real GDP axis,

00:03:58.010 --> 00:04:00.150
this is our full employment output,

00:04:00.150 --> 00:04:01.589
if you wanna put some numbers on it,

00:04:01.589 --> 00:04:03.834
maybe this is equal too
for a small economy,

00:04:03.834 --> 00:04:07.040
maybe this is equal to 50 billion dollars.

00:04:07.040 --> 00:04:09.300
So the way we've just described this,

00:04:09.300 --> 00:04:11.600
we are at equilibrium right now,

00:04:11.600 --> 00:04:13.380
we are at full employment output,

00:04:13.380 --> 00:04:16.880
our economy's producing 50
billion dollars per year

00:04:16.880 --> 00:04:19.040
and our full employment output

00:04:19.040 --> 00:04:21.510
implies an unemployment rate of 4%,

00:04:21.510 --> 00:04:23.967
where we have 1% inflation.

00:04:23.967 --> 00:04:27.072
Now let's say that there's
some type of a demand shock,

00:04:27.072 --> 00:04:28.170
let's say all of a sudden,

00:04:28.170 --> 00:04:30.081
the government wants to
stimulate the economy

00:04:30.081 --> 00:04:33.371
even beyond where it is
here and so you have a,

00:04:33.371 --> 00:04:35.810
and so they start
spending all of this money

00:04:35.810 --> 00:04:38.670
and so you have a shift in
the aggregate demand curve,

00:04:38.670 --> 00:04:41.204
so it would shift to the right,

00:04:41.204 --> 00:04:43.140
so the aggregate demand curve

00:04:43.140 --> 00:04:45.740
would now look something like this,

00:04:45.740 --> 00:04:48.115
let's call that aggregate demand two,

00:04:48.115 --> 00:04:49.412
well, what happens now?

00:04:49.412 --> 00:04:52.290
And we've seen this in previous videos,

00:04:52.290 --> 00:04:54.731
now you have, we go from
this equilibrium point,

00:04:54.731 --> 00:04:57.840
which was at this full employment output

00:04:57.840 --> 00:05:02.840
and at this price level, let's
call that price level one

00:05:02.850 --> 00:05:05.078
and now we are at this equilibrium point,

00:05:05.078 --> 00:05:07.257
people are demanding
more, so suppliers say,

00:05:07.257 --> 00:05:08.727
"Hey, if you want me to produce more,

00:05:08.727 --> 00:05:10.950
"I'm gonna charge you
some more for it too,"

00:05:10.950 --> 00:05:13.030
so our price level has gone up,

00:05:13.030 --> 00:05:15.600
we're at price level two

00:05:15.600 --> 00:05:19.880
and we are producing above
full employment output,

00:05:19.880 --> 00:05:22.596
maybe this level right here is 60 billion,

00:05:22.596 --> 00:05:26.730
well, how would that be
reflected on our Phillips curves?

00:05:26.730 --> 00:05:27.980
Well, in the short run,

00:05:27.980 --> 00:05:31.550
our economy has gotten a
little bit above potential,

00:05:31.550 --> 00:05:33.030
so in the short run,

00:05:33.030 --> 00:05:35.210
so we would sit on the
short run Phillips curve

00:05:35.210 --> 00:05:38.200
and our unemployment rate would go down,

00:05:38.200 --> 00:05:39.760
but if we assume the Phillips curve,

00:05:39.760 --> 00:05:40.818
the short run Phillips curve model,

00:05:40.818 --> 00:05:43.480
that means our inflation would go up,

00:05:43.480 --> 00:05:45.710
so this point right over here

00:05:45.710 --> 00:05:50.710
might correspond maybe to
this point right over there,

00:05:51.160 --> 00:05:55.190
where when we get to that
beyond full employment output,

00:05:55.190 --> 00:05:59.630
let's say that this is 60
billion right over here,

00:05:59.630 --> 00:06:04.420
well maybe our unemployment rate is 2%

00:06:04.420 --> 00:06:08.143
and our inflation rate here is 3%,

00:06:08.990 --> 00:06:10.734
now what happens next?

00:06:10.734 --> 00:06:12.013
Well, we've talked about this

00:06:12.013 --> 00:06:15.200
when we studied aggregate
demand and aggregate supply,

00:06:15.200 --> 00:06:16.690
workers, when it's time for them

00:06:16.690 --> 00:06:18.537
to renegotiate their contracts will say,

00:06:18.537 --> 00:06:21.637
"Hey, prices have gone
up, I'm not going to work

00:06:21.637 --> 00:06:23.450
"for the same amounts over the long run,"

00:06:23.450 --> 00:06:25.950
and so you have a shift to the left

00:06:25.950 --> 00:06:28.560
of the aggregate supply curve,
at any given price level,

00:06:28.560 --> 00:06:31.920
there's going to be
less supply, less output

00:06:31.920 --> 00:06:33.600
and so if this shifts to the left,

00:06:33.600 --> 00:06:35.570
eventually the equilibrium point

00:06:35.570 --> 00:06:38.400
will go back to where
everything intersects

00:06:38.400 --> 00:06:41.460
with the long run aggregate supply curve,

00:06:41.460 --> 00:06:44.205
so the short run aggregate
supply curve shifts over there

00:06:44.205 --> 00:06:47.770
and then we would be back to
our full employment output,

00:06:47.770 --> 00:06:50.740
although our price level
would have gone even higher,

00:06:50.740 --> 00:06:52.370
price level three.

00:06:52.370 --> 00:06:55.490
Now many economists would argue
that when you have a shift

00:06:55.490 --> 00:06:57.710
in the short run aggregate supply,

00:06:57.710 --> 00:07:01.700
so this would be short
run aggregate supply two,

00:07:01.700 --> 00:07:04.180
that that also is associated with a shift

00:07:04.180 --> 00:07:06.720
in our short run Phillips curve,

00:07:06.720 --> 00:07:07.973
because of these price increases

00:07:07.973 --> 00:07:10.690
and because workers are trying

00:07:10.690 --> 00:07:12.930
to renegotiate their salaries upwards

00:07:12.930 --> 00:07:16.630
and labor is the biggest
factor in price levels,

00:07:16.630 --> 00:07:19.252
you might have increased
inflation expectations,

00:07:19.252 --> 00:07:22.089
so then the given rate of inflation,

00:07:22.089 --> 00:07:25.470
you might start having
a higher unemployment

00:07:25.470 --> 00:07:28.150
and so this short run Phillips curve

00:07:28.150 --> 00:07:30.970
could shift to the
right, so instead of this

00:07:30.970 --> 00:07:33.457
just gravitating back
to where it was before,

00:07:33.457 --> 00:07:35.740
the whole curve could shift to the right

00:07:35.740 --> 00:07:39.523
and we get to a situation
that looks like this,

00:07:41.010 --> 00:07:43.640
where our inflation is still at 3%,

00:07:43.640 --> 00:07:47.220
but we are back to the long run

00:07:47.220 --> 00:07:50.233
unemployment rate of this economy.


Net exports and capital outflows

WEBVTT
Kind: captions
Language: en

00:00:00.000 --> 00:00:00.833
- [Instructor] Let's take a look at

00:00:00.833 --> 00:00:03.710
our GDP equation for an open economy.

00:00:03.710 --> 00:00:07.040
So GDP is equal to national income.

00:00:07.040 --> 00:00:09.980
And that's going to be
equal to consumption

00:00:09.980 --> 00:00:12.520
plus investment, plus government spending.

00:00:12.520 --> 00:00:17.340
And since this is an open
economy, plus net exports.

00:00:17.340 --> 00:00:19.130
Now, the first thing I want to do

00:00:19.130 --> 00:00:21.960
is let's solve for net exports.

00:00:21.960 --> 00:00:25.450
So I'm gonna subtract all of
this stuff from both sides.

00:00:25.450 --> 00:00:29.520
So I could get national
income minus consumption,

00:00:29.520 --> 00:00:33.330
minus government spending,
minus investment,

00:00:33.330 --> 00:00:35.830
is equal to the next exports.

00:00:35.830 --> 00:00:38.940
This is just a manipulation
of what we just saw.

00:00:38.940 --> 00:00:42.560
Now, what is national
income minus consumption,

00:00:42.560 --> 00:00:44.620
minus government spending?

00:00:44.620 --> 00:00:47.510
Well, this right over
here is national savings.

00:00:47.510 --> 00:00:49.170
This is S.

00:00:49.170 --> 00:00:51.040
So another way we can think about it is

00:00:51.040 --> 00:00:54.620
national savings minus investment

00:00:54.620 --> 00:00:57.310
is equal to net exports.

00:00:57.310 --> 00:01:01.110
So let's use this to
think about capital flows.

00:01:01.110 --> 00:01:02.360
So first of all, let's just make sure

00:01:02.360 --> 00:01:03.910
we know what a capital flow is.

00:01:03.910 --> 00:01:07.010
So let's think about a capital inflow.

00:01:07.010 --> 00:01:08.300
What does that mean?

00:01:08.300 --> 00:01:11.180
That means that foreigners
are taking capital

00:01:11.180 --> 00:01:16.180
and taking it into our country
to buy assets in our country.

00:01:16.320 --> 00:01:19.080
And then outflow, that
means that residents

00:01:19.080 --> 00:01:22.000
of our country are taking
capital out of the country

00:01:22.000 --> 00:01:24.580
and buying foreign assets.

00:01:24.580 --> 00:01:28.330
And so do you think our
savings minus our investment

00:01:28.330 --> 00:01:31.313
is going to be a capital
inflow or a capital outflow?

00:01:32.370 --> 00:01:34.310
Well, we've saved a bunch of stuff,

00:01:34.310 --> 00:01:37.790
and we are spending some
of it on investment.

00:01:37.790 --> 00:01:39.950
And so what do we do with the rest of it?

00:01:39.950 --> 00:01:43.030
Well, it's gonna have to
go outside of the country.

00:01:43.030 --> 00:01:45.070
Because if it was being
invested inside the country,

00:01:45.070 --> 00:01:47.650
it would be in this I right over here.

00:01:47.650 --> 00:01:52.650
And so this is a net
capital, capital outflow.

00:01:55.360 --> 00:01:57.857
And you'll sometimes see
this abbreviated NCO.

00:01:59.948 --> 00:02:00.980
And so that sets up the identity

00:02:00.980 --> 00:02:04.430
that net capital outflows
are equal to net exports.

00:02:04.430 --> 00:02:06.570
Let me just right it again for emphasis.

00:02:06.570 --> 00:02:10.830
Net capital outflows are
equal to net exports.

00:02:10.830 --> 00:02:13.310
Now, why does this make sense?

00:02:13.310 --> 00:02:15.810
Well, let's say net exports are positive.

00:02:15.810 --> 00:02:19.230
That means more foreigners
are buying our goods

00:02:19.230 --> 00:02:21.240
than we are buying their goods.

00:02:21.240 --> 00:02:24.000
Now how are they going
to pay for those goods?

00:02:24.000 --> 00:02:25.470
Well, they're going to have
to pay for those goods,

00:02:25.470 --> 00:02:26.750
and we're not going to go into the details

00:02:26.750 --> 00:02:28.630
of currency exchange and all of that,

00:02:28.630 --> 00:02:31.480
but one way to think about
how they pay for those goods

00:02:31.480 --> 00:02:35.010
is that they need to
sell their foreign assets

00:02:35.010 --> 00:02:37.350
to folks in our country.

00:02:37.350 --> 00:02:39.010
So if it's folks in our country

00:02:39.010 --> 00:02:40.990
who are buying foreign assets

00:02:40.990 --> 00:02:43.660
so that the foreigners can buy our goods,

00:02:43.660 --> 00:02:47.610
that would be a net capital
outflow from our point of view.

00:02:47.610 --> 00:02:50.100
So hopefully that makes intuitive sense.

00:02:50.100 --> 00:02:52.220
Now, another way to think about this

00:02:52.220 --> 00:02:55.220
is we could rearrange this equation

00:02:55.220 --> 00:02:57.800
where if we subtract net
exports from both sides

00:02:57.800 --> 00:03:00.170
and then add investment to both sides,

00:03:00.170 --> 00:03:03.280
we could get national savings

00:03:03.280 --> 00:03:07.280
minus net exports, minus net exports,

00:03:07.280 --> 00:03:10.170
is equal to investment.

00:03:10.170 --> 00:03:14.950
Now, if net exports is equal
to net capital outflows,

00:03:14.950 --> 00:03:18.290
what would be the negative
of net exports be?

00:03:18.290 --> 00:03:21.730
Well, this would be net capital inflows.

00:03:21.730 --> 00:03:23.300
So we could set up another equation.

00:03:23.300 --> 00:03:25.230
And these are all fairly
straightforward algebra,

00:03:25.230 --> 00:03:26.640
but they give us a little bit of intuition

00:03:26.640 --> 00:03:29.360
of how to think about
these different levers.

00:03:29.360 --> 00:03:34.090
So we could say savings plus,
I'll write the word out,

00:03:34.090 --> 00:03:37.720
net capital inflow

00:03:39.240 --> 00:03:41.810
is equal to investment.

00:03:41.810 --> 00:03:43.260
Is equal to investment.

00:03:43.260 --> 00:03:46.053
And think about why this makes sense.

00:03:47.551 --> 00:03:49.260
If we have investment in our country,

00:03:49.260 --> 00:03:51.940
maybe we're building factories,
we're building roads,

00:03:51.940 --> 00:03:54.690
where is the capital for
that investment coming?

00:03:54.690 --> 00:03:57.100
It's either coming from domestic savings,

00:03:57.100 --> 00:03:59.200
national savings right over here,

00:03:59.200 --> 00:04:01.250
or it's coming from foreigners

00:04:01.250 --> 00:04:02.910
bringing capital into our country

00:04:02.910 --> 00:04:05.270
which can be used for investment.

00:04:05.270 --> 00:04:06.900
So I will leave you there.

00:04:06.900 --> 00:04:09.910
The big takeaway is is
we can just manipulate

00:04:09.910 --> 00:04:12.850
the GDP equation for an open economy here

00:04:12.850 --> 00:04:15.490
to get to this notion
that net capital outflows

00:04:15.490 --> 00:04:17.400
are equal to net exports.

00:04:17.400 --> 00:04:19.210
Or that the negative of net exports,

00:04:19.210 --> 00:04:20.640
which would be net imports,

00:04:20.640 --> 00:04:22.650
is equal to net capital inflows.

00:04:22.650 --> 00:04:25.183
And hopefully this makes
some intuitive sense.


National savings and investment

WEBVTT
Kind: captions
Language: en

00:00:00.170 --> 00:00:02.120
- [Instructor] In this
video we are going to use

00:00:02.120 --> 00:00:05.570
the GDP equation that we have seen before

00:00:05.570 --> 00:00:09.380
to think about how national
savings relates to investment.

00:00:09.380 --> 00:00:12.020
And really it's a way to
algebraically manipulate things

00:00:12.020 --> 00:00:15.170
to ensure that it fits with our intuition.

00:00:15.170 --> 00:00:16.970
So another way to think about a GDP

00:00:16.970 --> 00:00:19.370
is it's the same thing as national income,

00:00:19.370 --> 00:00:21.580
which we donate with a capital letter Y.

00:00:21.580 --> 00:00:24.010
And GDP or national income,

00:00:24.010 --> 00:00:25.410
we can account for it by saying,

00:00:25.410 --> 00:00:29.210
hey, that's going to be
the sum of consumption plus

00:00:29.210 --> 00:00:33.530
investment plus government
spending in a closed economy.

00:00:33.530 --> 00:00:35.330
We could also think about an open economy

00:00:35.330 --> 00:00:37.760
where you have net
exports right over here,

00:00:37.760 --> 00:00:39.970
but let's just focus on
a closed economy for now.

00:00:39.970 --> 00:00:41.300
So I'm gonna just actually label this.

00:00:41.300 --> 00:00:46.260
We're gonna deal with a
closed, closed economy.

00:00:46.260 --> 00:00:49.270
In a future video I will
open the economy up.

00:00:49.270 --> 00:00:51.760
But how could we solve for savings?

00:00:51.760 --> 00:00:54.250
Well, what happens if
we subtract consumption

00:00:54.250 --> 00:00:57.980
and government spending from
both sides of this equation?

00:00:57.980 --> 00:01:00.570
Well then you're gonna
have national income

00:01:01.450 --> 00:01:05.870
minus consumption, minus
government spending,

00:01:05.870 --> 00:01:09.600
is equal to investment.

00:01:09.600 --> 00:01:12.450
Now, what is another way of thinking about

00:01:12.450 --> 00:01:15.130
this left-hand side of this equation?

00:01:15.130 --> 00:01:17.630
So at a national level this is the income

00:01:17.630 --> 00:01:19.560
minus how much is being consumed

00:01:19.560 --> 00:01:21.080
and how much the government is spending.

00:01:21.080 --> 00:01:24.410
So it's income minus the
different types of spending.

00:01:24.410 --> 00:01:28.010
Well, you could view
this as national savings.

00:01:28.010 --> 00:01:31.580
National savings.

00:01:31.580 --> 00:01:35.030
And we see here this identity
that national savings,

00:01:35.030 --> 00:01:37.530
which is often denoted with a capital S,

00:01:37.530 --> 00:01:40.200
is equal to investment.

00:01:40.200 --> 00:01:42.960
And if that isn't
intuitive for you at first,

00:01:42.960 --> 00:01:45.770
just think about it at
a kind of human scale.

00:01:45.770 --> 00:01:50.090
If I am saving things and I
am putting it into a bank,

00:01:50.090 --> 00:01:52.220
that bank will then lend that money

00:01:52.220 --> 00:01:54.830
that can be used for investment.

00:01:54.830 --> 00:01:57.090
And we can break this down even more

00:01:57.090 --> 00:01:59.500
if we wanna think about taxes.

00:01:59.500 --> 00:02:03.350
So let's just say T is equal to taxes.

00:02:03.350 --> 00:02:06.920
So let's just think about
the private economy first.

00:02:06.920 --> 00:02:10.070
So if we think about the national income

00:02:10.070 --> 00:02:13.340
minus consumption spending,

00:02:13.340 --> 00:02:16.160
and then folks have
got to pay their taxes.

00:02:16.160 --> 00:02:18.540
So minus taxes.

00:02:18.540 --> 00:02:20.310
And then where do those taxes go?

00:02:20.310 --> 00:02:21.250
Well, they go to the government,

00:02:21.250 --> 00:02:22.380
so they stay in the economy.

00:02:22.380 --> 00:02:23.990
So notice, I'm not changing this equation,

00:02:23.990 --> 00:02:26.490
I'm just subtracting taxes
and then adding taxes.

00:02:26.490 --> 00:02:30.440
And then I subtract from
that government spending.

00:02:30.440 --> 00:02:32.730
These two equations are equivalent

00:02:32.730 --> 00:02:35.140
and this is going to be equal to

00:02:35.140 --> 00:02:38.090
our investment in our closed economy.

00:02:38.090 --> 00:02:42.530
Now, if you look at this
left-hand side right over here,

00:02:42.530 --> 00:02:45.600
you could view this as private savings.

00:02:45.600 --> 00:02:46.840
This is the national income,

00:02:46.840 --> 00:02:48.730
minus how much is being consumed,

00:02:48.730 --> 00:02:51.430
minus how much is being
paid to the government.

00:02:51.430 --> 00:02:55.563
So this is private, private savings.

00:02:56.800 --> 00:02:59.060
And if you look at the second part,

00:02:59.060 --> 00:03:00.970
the taxes the government gets

00:03:00.970 --> 00:03:03.230
minus how much the government spends,

00:03:03.230 --> 00:03:05.360
this you could view as public savings.

00:03:05.360 --> 00:03:07.890
Public savings.

00:03:07.890 --> 00:03:10.760
In most countries this
is neutral to negative,

00:03:10.760 --> 00:03:12.440
so it's actually the
public savings are negative

00:03:12.440 --> 00:03:13.730
'cause the government spends more

00:03:13.730 --> 00:03:16.060
than the amount of revenue gets in taxes.

00:03:16.060 --> 00:03:18.110
But either way you could see the T minus G

00:03:18.110 --> 00:03:19.660
would be the public savings,

00:03:19.660 --> 00:03:22.960
and you add public savings
and private savings together,

00:03:22.960 --> 00:03:25.353
you get national savings.


Nominal interest, real interest, and inflation calculations

WEBVTT
Kind: captions
Language: en

00:00:00.300 --> 00:00:01.770
- [Instructor] Let's say that you agree

00:00:01.770 --> 00:00:03.330
to lend me some money.

00:00:03.330 --> 00:00:06.300
Say, you agree to lend me $100.

00:00:06.300 --> 00:00:08.000
And I ask you, all right,

00:00:08.000 --> 00:00:09.690
do I just have to pay you back $100?

00:00:09.690 --> 00:00:11.360
And you say, no, no,
you want some interest.

00:00:11.360 --> 00:00:13.080
And I say, how much interest?

00:00:13.080 --> 00:00:16.090
And you say that you
are going to charge me

00:00:16.090 --> 00:00:19.990
5% per year interest.

00:00:19.990 --> 00:00:22.357
So one way to think
about it is if I borrow

00:00:22.357 --> 00:00:27.120
$100 today, so $100 today,

00:00:27.120 --> 00:00:29.917
in a year I'm going to
have to pay you back

00:00:29.917 --> 00:00:34.130
$100 times, I'm gonna
have to grow it by 5%,

00:00:34.130 --> 00:00:38.030
so that's the same thing
as multiplying it by 1.05.

00:00:38.030 --> 00:00:39.700
This is how much I'm
going to have to pay back.

00:00:39.700 --> 00:00:40.533
Let me write this down.

00:00:40.533 --> 00:00:42.160
This is borrow.

00:00:42.160 --> 00:00:45.970
This is what I'm going
to have to pay back.

00:00:45.970 --> 00:00:49.370
And so this interest rate,
that just the face value

00:00:49.370 --> 00:00:51.460
of how much more I'm
gonna have to pay back,

00:00:51.460 --> 00:00:54.260
this is known as the
nominal interest rate.

00:00:54.260 --> 00:00:58.180
Nominal interest rate.

00:00:58.180 --> 00:01:02.393
And we can compare this
to the real interest rate.

00:01:03.460 --> 00:01:04.460
And you might say, why do we need

00:01:04.460 --> 00:01:06.700
some other type of interest rate?

00:01:06.700 --> 00:01:09.330
Well, even though on the face value

00:01:09.330 --> 00:01:11.600
I'm paying you back 5% more,

00:01:11.600 --> 00:01:12.840
that doesn't necessarily mean

00:01:12.840 --> 00:01:14.050
that you're going to be able to buy

00:01:14.050 --> 00:01:16.980
5% more with the money
that you get paid back.

00:01:16.980 --> 00:01:19.200
And you might guess why that is the case.

00:01:19.200 --> 00:01:21.227
Because of inflation.

00:01:21.227 --> 00:01:25.080
$105 will not necessarily
buy you in a year

00:01:25.080 --> 00:01:26.770
what it might buy you today.

00:01:26.770 --> 00:01:28.620
And so that's what the real interest

00:01:28.620 --> 00:01:30.710
rate is trying to get at.

00:01:30.710 --> 00:01:33.800
And to do that, to calculate
our real interest rate,

00:01:33.800 --> 00:01:36.440
we are going to have to
think about inflation.

00:01:36.440 --> 00:01:38.793
So let me put inflation right over here.

00:01:40.020 --> 00:01:42.650
And so let's say that we are in a world

00:01:42.650 --> 00:01:45.640
that has 2% inflation.

00:01:45.640 --> 00:01:49.200
So an indicative, a basket of
goods that cost $100 today,

00:01:49.200 --> 00:01:50.500
if this is the inflation rate,

00:01:50.500 --> 00:01:54.090
would cost $102 in a year.

00:01:54.090 --> 00:01:55.810
So there's two ways folks

00:01:55.810 --> 00:01:57.730
will calculate the real interest rate,

00:01:57.730 --> 00:02:00.750
given the nominal interest
rate and the inflation rate.

00:02:00.750 --> 00:02:02.610
The first way is an approximation,

00:02:02.610 --> 00:02:04.600
but it's very simple and
you can do it in your head.

00:02:04.600 --> 00:02:06.790
And that's why it's often the
first way that it's taught,

00:02:06.790 --> 00:02:09.200
but it's not exactly
mathematically correct.

00:02:09.200 --> 00:02:10.410
So the first way you'd say, well,

00:02:10.410 --> 00:02:12.570
this could approximately be equal to

00:02:12.570 --> 00:02:16.210
the nominal interest rate
minus the inflation rate.

00:02:16.210 --> 00:02:18.560
So you could say this could
be approximately equal to

00:02:18.560 --> 00:02:23.560
5% minus, minus 2%,

00:02:23.820 --> 00:02:27.430
which would be equal to 3%.

00:02:27.430 --> 00:02:30.260
And this is a decent approximation.

00:02:30.260 --> 00:02:32.820
But the actual way that you
would want to calculate this

00:02:32.820 --> 00:02:34.810
if you wanted to be more
mathematically precise

00:02:34.810 --> 00:02:36.450
is that your nominal interest rate

00:02:36.450 --> 00:02:41.190
multiplies things by 1.05, so 1.05.

00:02:41.190 --> 00:02:42.860
But then things are getting more expensive

00:02:42.860 --> 00:02:45.090
at a rate of 2% per year.

00:02:45.090 --> 00:02:46.150
Or another way to think about it,

00:02:46.150 --> 00:02:50.420
costs are being multiplied
by 1.02 every year.

00:02:50.420 --> 00:02:54.710
So we divide by that
amount, 1.2 every year.

00:02:54.710 --> 00:02:59.710
And so this was going to give us 1.05

00:02:59.740 --> 00:03:04.740
divided by 1.02 is equal to 1.0294.

00:03:06.833 --> 00:03:09.720
1.0294.

00:03:09.720 --> 00:03:10.810
And another way to think about it,

00:03:10.810 --> 00:03:12.820
we just got a much better sense

00:03:12.820 --> 00:03:14.240
of what the real interest rate is.

00:03:14.240 --> 00:03:18.260
It's actually much closer, 2.94% interest.

00:03:18.260 --> 00:03:20.230
And this is a very small difference,

00:03:20.230 --> 00:03:22.210
and so that's why people like this method.

00:03:22.210 --> 00:03:25.090
You can do it in your head
and it got pretty close.

00:03:25.090 --> 00:03:27.680
But keep in mind, even very small changes

00:03:27.680 --> 00:03:29.330
in interest can make a big deal

00:03:29.330 --> 00:03:31.330
when we compound over many years.

00:03:31.330 --> 00:03:33.853
And in other videos we've
talked about compounding.


Loanable funds market

WEBVTT
Kind: captions
Language: en

00:00:00.290 --> 00:00:02.180
- [Instructor] We are used
to thinking about markets

00:00:02.180 --> 00:00:03.630
for goods and services,

00:00:03.630 --> 00:00:06.120
and demand and supply
of goods and services,

00:00:06.120 --> 00:00:08.920
and what we're gonna do in
this video is broaden our sense

00:00:08.920 --> 00:00:10.250
of what a market could be for

00:00:10.250 --> 00:00:13.910
by thinking about the
market for loanable funds.

00:00:13.910 --> 00:00:16.810
Now, this might seem like
a very technical term,

00:00:16.810 --> 00:00:19.520
loanable funds, but it
literally just means funds

00:00:19.520 --> 00:00:23.180
that people are supplying to
be lent out to other people

00:00:23.180 --> 00:00:25.190
and funds that people are demanding

00:00:25.190 --> 00:00:26.660
that they want to borrow.

00:00:26.660 --> 00:00:29.210
And so, one way to
think about this market,

00:00:29.210 --> 00:00:33.060
the suppliers in the
loanable funds market,

00:00:33.060 --> 00:00:35.750
these are the savers.

00:00:35.750 --> 00:00:39.390
So, when you go and save
some money, maybe at a bank,

00:00:39.390 --> 00:00:42.380
that bank will then lend
that money to someone else

00:00:42.380 --> 00:00:44.630
and because the bank is getting
interest from that person,

00:00:44.630 --> 00:00:46.710
they can also afford to
pay you some interest,

00:00:46.710 --> 00:00:48.200
so you get a return.

00:00:48.200 --> 00:00:50.040
It doesn't always have
to be through a bank,

00:00:50.040 --> 00:00:51.330
but that tends to be typical.

00:00:51.330 --> 00:00:53.910
It will go through some
type of intermediary.

00:00:53.910 --> 00:00:56.420
Similarly, who are the demanders

00:00:56.420 --> 00:00:58.150
or where's the demand coming from?

00:00:58.150 --> 00:01:00.330
I don't know if demanders is a real word,

00:01:00.330 --> 00:01:01.770
but I'll just write it down.

00:01:01.770 --> 00:01:04.860
So, where is the demand coming from?

00:01:04.860 --> 00:01:07.920
Well, that is coming from the borrowers

00:01:07.920 --> 00:01:10.990
who are interested in,
maybe, making an investment,

00:01:10.990 --> 00:01:12.760
maybe some type of business opportunity

00:01:12.760 --> 00:01:13.930
is available to them.

00:01:13.930 --> 00:01:16.050
And as I mentioned, this isn't a market

00:01:16.050 --> 00:01:18.080
where the suppliers and the demanders,

00:01:18.080 --> 00:01:19.450
or the savers and the borrowers,

00:01:19.450 --> 00:01:21.580
necessarily directly
interact with each other.

00:01:21.580 --> 00:01:23.090
Every now and then you might get a loan

00:01:23.090 --> 00:01:25.970
from your sister-in-law
or from your parents,

00:01:25.970 --> 00:01:29.760
but oftentimes, usually,
it's going through some type

00:01:29.760 --> 00:01:32.490
of institution, some type
of financial institution,

00:01:32.490 --> 00:01:36.270
usually banks, where the savers
put their money in a bank

00:01:36.270 --> 00:01:38.040
hoping, not just for save keeping,

00:01:38.040 --> 00:01:40.330
but really to get a return on their money.

00:01:40.330 --> 00:01:42.830
In order to provide a
return to those savers,

00:01:42.830 --> 00:01:45.550
the bank will then lend
it out to borrowers

00:01:45.550 --> 00:01:47.400
and charge interest to them.

00:01:47.400 --> 00:01:49.440
And to appreciate this in the way

00:01:49.440 --> 00:01:51.420
that we've looked at markets before,

00:01:51.420 --> 00:01:54.630
I can set up two axes

00:01:54.630 --> 00:01:57.020
and in any market that
we've looked at before,

00:01:57.020 --> 00:02:00.090
the horizontal axis, this is the quantity,

00:02:00.090 --> 00:02:02.400
and so here, we're
talking about the quantity

00:02:03.990 --> 00:02:06.100
of loanable funds,

00:02:06.100 --> 00:02:07.840
loanable

00:02:07.840 --> 00:02:09.340
funds.

00:02:09.340 --> 00:02:10.830
And then on the vertical axis,

00:02:10.830 --> 00:02:12.160
we normally think about the price

00:02:12.160 --> 00:02:13.520
for the good or service,

00:02:13.520 --> 00:02:15.450
but when we're dealing
with loanable funds,

00:02:15.450 --> 00:02:16.950
the price is the interest rate.

00:02:16.950 --> 00:02:18.730
And if we want to know the real price,

00:02:18.730 --> 00:02:21.550
we should be talking about
the real interest rate.

00:02:21.550 --> 00:02:23.210
Real

00:02:23.210 --> 00:02:24.080
interest

00:02:25.400 --> 00:02:26.490
rate.

00:02:26.490 --> 00:02:29.010
And so, let's think about
each of these scenarios.

00:02:29.010 --> 00:02:30.430
Let's think about the savers

00:02:30.430 --> 00:02:33.760
who are really the suppliers
in the loanable funds market.

00:02:33.760 --> 00:02:35.970
When real interest rates are lower,

00:02:35.970 --> 00:02:37.040
if real interest rates are low,

00:02:37.040 --> 00:02:39.860
they don't wanna really
supply a lot of quantity.

00:02:39.860 --> 00:02:41.600
They're not getting,
not a lot of motivation

00:02:41.600 --> 00:02:44.750
to be a supplier, to
save in that situation.

00:02:44.750 --> 00:02:46.800
But if real interest rates are high,

00:02:46.800 --> 00:02:48.640
well, then they might say,

00:02:48.640 --> 00:02:52.660
I'm more likely to save and I
wanna make my funds available

00:02:52.660 --> 00:02:54.000
for loaning out to other people

00:02:54.000 --> 00:02:55.900
'cause I get this great interest rate,

00:02:55.900 --> 00:02:57.860
especially when it's a real interest rate.

00:02:57.860 --> 00:03:00.660
So, we could view it
as something like this.

00:03:00.660 --> 00:03:05.660
This we could call our
supply of loanable funds

00:03:05.890 --> 00:03:08.320
and you could imagine
what the demand curve

00:03:08.320 --> 00:03:10.060
for loanable funds looks like.

00:03:10.060 --> 00:03:12.040
When real interest rates are high,

00:03:12.040 --> 00:03:13.260
people say, hey, you know,

00:03:13.260 --> 00:03:14.840
there aren't that many
business opportunities

00:03:14.840 --> 00:03:18.000
that could justify borrowing
at that high of a rate,

00:03:18.000 --> 00:03:20.980
so there wouldn't be much
quantity that is demanded.

00:03:20.980 --> 00:03:22.130
But as the real interest rates,

00:03:22.130 --> 00:03:25.310
or if the real interest rates
are lower, as they get lower,

00:03:25.310 --> 00:03:30.160
then the quantity demanded of
loanable funds will be higher.

00:03:30.160 --> 00:03:34.300
So, this is our demand for loanable funds

00:03:34.300 --> 00:03:36.220
and like we've seen in the past,

00:03:36.220 --> 00:03:39.970
you're going to have an
equilibrium quantity and price,

00:03:39.970 --> 00:03:41.260
where price, in this situation,

00:03:41.260 --> 00:03:43.030
is your real interest rate

00:03:43.030 --> 00:03:46.110
and so that's going to
happen where these intersect.

00:03:46.110 --> 00:03:49.460
This is our equilibrium quantity

00:03:49.460 --> 00:03:54.230
and this is our equilibrium
real interest rate.

00:03:54.230 --> 00:03:56.820
Now, let's think about
what would happen if one

00:03:56.820 --> 00:04:00.270
or both of these curves
were to shift somehow.

00:04:00.270 --> 00:04:01.700
And there's a couple of ways,

00:04:01.700 --> 00:04:03.750
let's start with the
demand for loanable funds.

00:04:03.750 --> 00:04:05.030
There's a couple of ways that the demand

00:04:05.030 --> 00:04:07.410
for loanable funds curve could shift.

00:04:07.410 --> 00:04:10.330
Maybe all of a sudden people
see new business opportunities.

00:04:10.330 --> 00:04:12.190
Astroid mining is becoming a thing

00:04:12.190 --> 00:04:15.340
and so people wanna
borrow money to get robots

00:04:15.340 --> 00:04:16.620
and send them out into space

00:04:16.620 --> 00:04:19.340
so they can mine asteroids
for platinum or something.

00:04:19.340 --> 00:04:20.230
Well, what would happen?

00:04:20.230 --> 00:04:22.290
Pause this video and think about that.

00:04:22.290 --> 00:04:24.700
Well, then at any given
real interest rate,

00:04:24.700 --> 00:04:27.440
there's gonna be a
higher quantity demanded.

00:04:27.440 --> 00:04:30.010
So, in that situation, our demand

00:04:30.010 --> 00:04:32.980
for loanable funds would
shift to the right.

00:04:32.980 --> 00:04:34.150
It would look something like this.

00:04:34.150 --> 00:04:36.710
So, this is demand for loanable funds,

00:04:36.710 --> 00:04:37.910
I'll call it sub two.

00:04:37.910 --> 00:04:40.840
Sometimes you'll see
something like a prime there,

00:04:40.840 --> 00:04:41.820
but I'll call it sub two.

00:04:41.820 --> 00:04:44.120
So, it has shifted to the right

00:04:44.120 --> 00:04:46.350
because of new business opportunities.

00:04:46.350 --> 00:04:48.360
Another common reason why that might shift

00:04:48.360 --> 00:04:50.960
to the right is if maybe the government

00:04:50.960 --> 00:04:52.310
is doing a lot more borrowing.

00:04:52.310 --> 00:04:54.120
Remember, this is an
aggregate market here.

00:04:54.120 --> 00:04:56.320
So, the government, when it borrows money

00:04:56.320 --> 00:04:58.780
to fuel its spending, that also,

00:04:58.780 --> 00:05:00.760
it has to go into the
loanable funds market

00:05:00.760 --> 00:05:02.320
and so, increased government borrowing

00:05:02.320 --> 00:05:04.250
would also shift this to the right.

00:05:04.250 --> 00:05:05.500
And if the opposite happened,

00:05:05.500 --> 00:05:07.750
if people thought there were
fewer business opportunities

00:05:07.750 --> 00:05:09.580
or if the government
started to borrow less,

00:05:09.580 --> 00:05:12.150
well, that would shift things to the left.

00:05:12.150 --> 00:05:14.000
But let's just think
about what would happen.

00:05:14.000 --> 00:05:17.870
If R is the current
equilibrium interest rate,

00:05:17.870 --> 00:05:19.940
if that just stayed where it is,

00:05:19.940 --> 00:05:21.380
well, then you're going to have a shortage

00:05:21.380 --> 00:05:23.880
of loanable funds, where the
suppliers would be willing

00:05:23.880 --> 00:05:27.800
to supply this quantity
while the borrowers are going

00:05:27.800 --> 00:05:30.900
to want this quantity here
at that real interest rate.

00:05:30.900 --> 00:05:32.780
And so what you're going to have happen is

00:05:32.780 --> 00:05:35.300
you're gonna get to a
new equilibrium point.

00:05:35.300 --> 00:05:39.370
The real interest rate is
going to go up to this point,

00:05:39.370 --> 00:05:43.120
let's call that our new
equilibrium real interest rate,

00:05:43.120 --> 00:05:47.843
and our quantity is going
to go up as well, so Q1.

00:05:49.460 --> 00:05:52.250
In order to convince more suppliers

00:05:52.250 --> 00:05:54.020
to part with their money,
not part with their money,

00:05:54.020 --> 00:05:56.540
or at least make their
money available for lending,

00:05:56.540 --> 00:05:59.200
well, the interest rate's
going to have to go up

00:05:59.200 --> 00:06:01.860
and we get to that point right there.

00:06:01.860 --> 00:06:04.810
Similarly, you could
have shifts in the supply

00:06:04.810 --> 00:06:06.820
of loanable funds.

00:06:06.820 --> 00:06:09.210
Let's say, for example,
the savings rate changes

00:06:09.210 --> 00:06:10.043
for some reason.

00:06:10.043 --> 00:06:13.800
There's a big marketing
campaign from the government

00:06:13.800 --> 00:06:15.730
or in education or in schools that say,

00:06:15.730 --> 00:06:18.310
hey, we need to save more for a rainy day.

00:06:18.310 --> 00:06:20.470
You need to save more for our retirement.

00:06:20.470 --> 00:06:22.860
Well, then the supply of loanable funds,

00:06:22.860 --> 00:06:26.180
if everyone saves more at
any given real interest rate,

00:06:26.180 --> 00:06:28.680
well, then the supply
for loanable funds curve

00:06:28.680 --> 00:06:30.050
could shift to the right,

00:06:30.050 --> 00:06:31.040
and if the opposite happened,

00:06:31.040 --> 00:06:32.610
of course it would shift to the left.

00:06:32.610 --> 00:06:35.780
Supply of loanable funds two,

00:06:35.780 --> 00:06:37.200
and then what would happen?

00:06:37.200 --> 00:06:39.500
Well, if we were at this
point right over here,

00:06:39.500 --> 00:06:41.400
all of a sudden we are in a situation

00:06:41.400 --> 00:06:43.610
where there's a surplus of loanable funds.

00:06:43.610 --> 00:06:45.940
At this interest rate, people are willing

00:06:45.940 --> 00:06:48.240
to supply way more loanable funds

00:06:48.240 --> 00:06:49.930
than people are demanding,

00:06:49.930 --> 00:06:51.680
so then the price of the loanable funds,

00:06:51.680 --> 00:06:54.590
which is the real interest
rate, will go down.

00:06:54.590 --> 00:06:58.740
It will go down to this
new equilibrium point,

00:06:58.740 --> 00:07:02.430
and so here, this, we
could call this R sub three

00:07:02.430 --> 00:07:04.620
would be our new real interest rate,

00:07:04.620 --> 00:07:06.250
equilibrium real interest rate,

00:07:06.250 --> 00:07:10.240
and this would be our
new equilibrium quantity.

00:07:10.240 --> 00:07:13.110
Actually, let me call this
R sub two right over here.

00:07:13.110 --> 00:07:14.830
So, I will leave you there.

00:07:14.830 --> 00:07:18.400
The big takeaway is
that loanable funds kind

00:07:18.400 --> 00:07:21.000
of operate the way the market
for almost anything would

00:07:21.000 --> 00:07:23.030
with the difference being that the price

00:07:23.030 --> 00:07:25.030
is no longer just a dollar amount,

00:07:25.030 --> 00:07:26.400
it is an interest rate

00:07:26.400 --> 00:07:28.380
and since we wanna factor out inflation,

00:07:28.380 --> 00:07:30.163
it is a real interest rate.


Campaign finance

WEBVTT
Kind: captions
Language: en

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- [Instructor] Let's
talk a little bit about

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money and elections in the United States,

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and the various actors
that might be involved.

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You of course at the center of the action,

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you have the various
campaigns for the candidates.

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Then you have the party committees

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that will try to influence the election,

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and we'll talk about how in a little bit.

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You have individuals who
besides being voters,

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can also be donors.

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And then you have organizations.

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It could be corporations,
it could be interest groups,

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it could be labor unions.

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And then last but not least,
we have these two boxes

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where you see PAC 1 and PAC 2.

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The obvious question is, what is a PAC?

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Well it stands for
political action committee,

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and they've been around for decades.

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A simple way to think about is
it's a way to pool resources

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which then can be donated to other parties

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to influence an election.

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But how can the money actually flow?

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Well as you can see, it can flow in many,

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many, many different ways.

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And to help us understand this,

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I'm gonna introduce some terminology

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that you might've heard before.

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There is hard money.

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Hard money is money that
is actually regulated

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by the Federal Election Committee,

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and there are caps in terms of how much

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people can donate to various parties.

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In general, any donation
to a candidate's campaign

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is considered hard money.

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That would be hard money there
coming from the individuals.

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This would be hard money right over here

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coming from that PAC which
has pooled a bunch of money.

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This would be hard money right over here

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coming from that PAC to
Donald Trump's campaign.

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This would be hard money coming
from the Democratic party

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to Hillary Clinton's campaign,

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or from the Republican party
to Donald Trump's campaign.

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If there's something called hard money,

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perhaps there's also
something called soft money,

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and you would be correct.

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There is something called soft money.

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A simple definition for soft money is

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it doesn't have the regulations
that hard money does.

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An example of it would be let's say

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the Democratic party
here, some of the money

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that they spend, so I'll just draw

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some of the money they spend,
this part right over here.

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Maybe some of the money
that the Republican party

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spends during the election, it's used for

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what's sometimes known as
party building activities

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to get more people to join their party,

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or to advertise about certain issues.

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As long as it's done not in coordination

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with the candidate's campaigns,

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this is not going to have any limit.

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Some of the money that goes
from an individual to a party,

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or some of the money that
goes from a PAC to a party,

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can also be considered
soft money if once again,

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if it keeps separate
from coordinating with

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the candidate's actual campaign,

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and used for those party
building activities.

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Now party building is a
pretty broad definition.

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Soft money has been demonized a lot

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because people say well, it's
just a way of getting around

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campaign finance regulations.

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Because even though it might
not be directly coordinated

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with a candidate's campaign,
it can influence an election

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in a pretty significant way.

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Now to further understand this diagram,

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you see these dotted lines
between the corporations

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or the labor unions and these
political action committees.

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What does that mean?

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Well a political action
committee can be connected

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or sponsored by a
corporation or a labor union,

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but it cannot receive funds
directly from the treasury

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of that corporation or labor union.

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The corporation can
sponsor it, can say hey,

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this is associated with us.

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If it's say, a labor union,
it can go to its membership

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and say hey, I want you
to donate to this PAC.

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If it's a corporation it can
go to its management team

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and say hey, let's all donate
to this PAC personally.

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Or it could go to its
shareholders and say hey,

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why don't we all donate to this PAC?

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Because this PAC can donate money

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to the party or the
candidate that might help

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influence the election in a
way that might benefit us,

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or benefit the corporation.

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Now an attempt to limit
soft money came in 2002,

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when you have the Bipartisan
Campaign Reform Act of 2002,

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often known as McCain-Feingold,

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who are the two sponsors in the Senate.

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Among other things, it tried
to limit this soft money.

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After this Act, even this party spending

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would have to be hard money.

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It would have to be subjected to the caps

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when they are raising that money.

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It also made clear that
corporations and labor unions

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couldn't participate in what's called

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election nearing activities,

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where they're spending money on say,

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issue-based ads with oftentimes,

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the intent of influencing the election,

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especially in the run up to the election.

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This was made explicitly illegal as well.

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This gets challenged in 2010
where you have this major case,

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Citizens United versus the
Federal Election Committee.

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Citizens United was an organization

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that was releasing a movie
called Hillary the Movie

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during the 2008 election.

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This was a movie that was pretty negative

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on Hillary Clinton.

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The argument of the
government was that hey,

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even though this looks like a movie,

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it's really political advertising.

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It's electioneering as we go
into the run up to an election,

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and so Citizens United, which
is a nonprofit corporation

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should not be able to do this.

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But the Supreme Court ruled
in Citizens United's favor.

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They said, as long as
they are not coordinating

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with the actual candidate's campaigns,

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they are allowed based on
the notion of free speech

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to directly participate in electioneering

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in the run up to an election.

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And to a large degree, the
Citizens United ruling from 2010

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really gutted the strength of

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the Bipartisan Campaign
Reform Act of 2002.

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That Act was trying to curtail soft money,

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that for the most part,
was going through parties.

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But now post-Citizens United,

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on both sides, folks started to say gee,

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I could start an organization
that pools money.

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Let's call that a PAC.

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But I'm gonna keep it independent.

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It's not gonna coordinate in any other way

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with the elections of the
individual candidates,

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and so this is often
referred to technically

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as an independent expenditure PAC.

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Here, post-Citizens United,
I can get unlimited funding

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from corporations, or from individuals

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that is not regulated in
terms of spending caps.

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And now I can spend an
unlimited amount of money

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on electioneering to try
to influence the campaign.

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Because of the power of these types of

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independent expenditure PACs,

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they have been termed Super PACs.

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Now the key difference between a Super PAC

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and a regular PAC is that the regular PACs

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that we talked about have limitations

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in terms of how much money
people can donate to them.

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They actually even can't take direct money

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from the treasuries of a
corporation or a labor union.

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They also had limitations in terms of

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how much they could donate
to an individual campaign.

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But they could donate to a campaign.

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A Super PAC, on the other hand,

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can take unlimited amounts
of funds from individuals,

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from other PACs, and it
could actually take money

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from corporate treasuries themselves.

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As long as they are independent of

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the candidates' campaigns, they
don't coordinate with them,

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they can spend as much
money as they would like.

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So as always, it's really
interesting to think about

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what is going to be the
eventual repercussions

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of Citizens United versus FEC?

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We've already seen in the 2016 elections

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money approaching a billion dollars

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in terms of Super PAC money.

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What is the influence
it has on the democracy?

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But a lot of folks might
immediately demonize the Super PAC

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and said say, money
was already in politics

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and this is just making it worse.

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Where now you have corporations
that are essentially

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being able to directly contribute
large amounts of money.

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We've always had issues
with foreign nationals

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contributing to our elections.

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We've always tried to prevent that.

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But a corporation can have
ownership from around the world

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even if it's a United
States-based corporation.

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How do you prevent foreign
interest from showing up

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through this money?

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But on the other hand,
I encourage you to read

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the Supreme Court's rulings

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because they had some
very strong arguments

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in terms of a slippery slope.

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If you don't allow Citizens
United to publish a movie,

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saying that it's electioneering,

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at what point what is something
a political organization,

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or a media organization?

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And the Supreme Court
found it very difficult

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to regulate Citizens
United without going down

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a slippery slope where
they would have to regulate

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a whole set of corporations and media.

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I'll let you think about it,

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but these questions are quite interesting.