Balance of payments: Capital account

WEBVTT
Kind: captions
Language: en

00:00:00.580 --> 00:00:03.730
In the last video, we started
to explore the payments that

00:00:03.730 --> 00:00:06.030
could flow into a country
or out of a country.

00:00:06.030 --> 00:00:07.900
And now I want to
continue it more.

00:00:07.900 --> 00:00:10.790
In particular, we focused on
the current account last time.

00:00:10.790 --> 00:00:13.940
And that focused on things like
trade, exports and imports,

00:00:13.940 --> 00:00:17.430
income earned from assets in
another country, or income

00:00:17.430 --> 00:00:19.120
that someone from
outside of the country

00:00:19.120 --> 00:00:21.670
earns from assets in the
country that we're studying,

00:00:21.670 --> 00:00:23.890
or just transfers
that are happening.

00:00:23.890 --> 00:00:25.910
Now when we look at
the capital account,

00:00:25.910 --> 00:00:27.890
in this video right over here--
and I wrote capital accounts,

00:00:27.890 --> 00:00:28.960
there shouldn't be
an s right there,

00:00:28.960 --> 00:00:30.460
when we look at the
capital account,

00:00:30.460 --> 00:00:32.770
we look at other
ways or other reasons

00:00:32.770 --> 00:00:36.130
why we might have inflows
or outflows of payments.

00:00:36.130 --> 00:00:38.450
And in particular,
the capital account

00:00:38.450 --> 00:00:44.660
is focused on that
the change in assets

00:00:44.660 --> 00:00:47.840
that either foreigners own
of, in this case, the US,

00:00:47.840 --> 00:00:52.062
or that US nationals own of
assets that are someplace else.

00:00:52.062 --> 00:00:53.770
And this little triangle
right over here,

00:00:53.770 --> 00:00:58.460
that is the Greek letter delta,
just shorthand for change in.

00:00:58.460 --> 00:01:05.560
So once again, let's focus
first on the inflows.

00:01:05.560 --> 00:01:07.540
And when you're talking
about change in assets,

00:01:07.540 --> 00:01:12.050
these would essentially be
someone outside the US buying

00:01:12.050 --> 00:01:17.520
assets inside the US from
someone that was not foreign.

00:01:17.520 --> 00:01:20.820
So for example, if
I am a home builder,

00:01:20.820 --> 00:01:22.680
I'm an American citizen,
I'm a home builder,

00:01:22.680 --> 00:01:25.550
I build a home in the US.

00:01:25.550 --> 00:01:28.650
And then I sell it,
for a million dollars

00:01:28.650 --> 00:01:31.860
to a Mexican national, maybe
for their vacation home.

00:01:31.860 --> 00:01:35.050
That means that for
just that transaction

00:01:35.050 --> 00:01:38.180
there has been an increase
in foreign ownership of US

00:01:38.180 --> 00:01:40.320
assets, that
million dollar home.

00:01:40.320 --> 00:01:47.270
And so this number would be
increased by a million dollars.

00:01:47.270 --> 00:01:48.770
And so that's why
it's an inflow,

00:01:48.770 --> 00:01:50.228
because when they
bought that house

00:01:50.228 --> 00:01:52.690
they would have had to
make a payment to me.

00:01:52.690 --> 00:01:54.642
And this right over
here-- I have a bunch

00:01:54.642 --> 00:01:56.100
of stuff written
over here-- change

00:01:56.100 --> 00:01:57.789
in foreign owned assets in US.

00:01:57.789 --> 00:01:59.830
And it also includes
financial derivatives there,

00:01:59.830 --> 00:02:01.663
you don't have to worry
too much about that.

00:02:01.663 --> 00:02:04.600
And it also has change
in foreign reserves.

00:02:04.600 --> 00:02:07.230
The one way to think about
the difference between that

00:02:07.230 --> 00:02:09.410
and that right
over there, this is

00:02:09.410 --> 00:02:12.553
you could view this as privately
owned changes in ownership.

00:02:12.553 --> 00:02:16.210
And this is by essentially
official changes in ownership

00:02:16.210 --> 00:02:18.680
by either the government
or the Central

00:02:18.680 --> 00:02:19.894
Banks of foreign countries.

00:02:19.894 --> 00:02:21.310
And for a lot of
countries they're

00:02:21.310 --> 00:02:22.768
essentially one
and the same thing.

00:02:22.768 --> 00:02:26.000
In the US, they kind of maintain
this pseudo-independence.

00:02:26.000 --> 00:02:28.150
But this is official,
you could kind of

00:02:28.150 --> 00:02:30.850
view this as official
government ownership.

00:02:30.850 --> 00:02:33.370
And this right over here
is, for the most part,

00:02:33.370 --> 00:02:34.940
private ownership.

00:02:34.940 --> 00:02:37.090
And once again, if
someone in England

00:02:37.090 --> 00:02:39.240
were to come into
the US and buy,

00:02:39.240 --> 00:02:43.120
let's say buy a share
of IBM from an American,

00:02:43.120 --> 00:02:45.720
then that would increase
this number right over here.

00:02:45.720 --> 00:02:51.160
But if the Central Bank of China
decided to buy a US government

00:02:51.160 --> 00:02:58.120
bond from an American
then this right over here,

00:02:58.120 --> 00:02:58.830
would increase.

00:02:58.830 --> 00:03:00.350
But they're both
the general idea.

00:03:00.350 --> 00:03:02.030
Someone buys an asset.

00:03:02.030 --> 00:03:04.030
We're not talking about
the income on the asset.

00:03:04.030 --> 00:03:05.580
We're talking about
the asset itself.

00:03:05.580 --> 00:03:09.736
Someone buys an asset
from, or changes hands from

00:03:09.736 --> 00:03:12.460
and American national
to a foreign national,

00:03:12.460 --> 00:03:14.080
then these numbers
would increase

00:03:14.080 --> 00:03:15.454
and those foreign
nationals would

00:03:15.454 --> 00:03:17.530
have to make a
payment into the US.

00:03:17.530 --> 00:03:20.750
So once again, these are
inflows right over here.

00:03:20.750 --> 00:03:23.860
Now we take the other
side of that coin.

00:03:23.860 --> 00:03:28.370
If I were to go out and buy
a vacation home in Italy,

00:03:28.370 --> 00:03:30.810
and let's say I buy
it from an Italian,

00:03:30.810 --> 00:03:32.860
then I would have to
make a payment to them.

00:03:32.860 --> 00:03:35.930
So that would be an
outflow from the US.

00:03:35.930 --> 00:03:37.650
And I would get
an asset in Italy,

00:03:37.650 --> 00:03:39.450
in exchange for it,
my vacation home.

00:03:39.450 --> 00:03:42.709
And so this number right
over here would increase.

00:03:42.709 --> 00:03:44.500
But once again, I wrote
over here in orange

00:03:44.500 --> 00:03:45.560
because it is an outflow.

00:03:45.560 --> 00:03:48.630
I'm making a payment
to a foreign national.

00:03:48.630 --> 00:03:50.410
And this once again,
this is a breakdown

00:03:50.410 --> 00:03:53.290
between-- this is really the
private sector for the most

00:03:53.290 --> 00:03:53.900
part.

00:03:53.900 --> 00:03:59.100
And this over here is
the US Federal Reserve.

00:03:59.100 --> 00:04:00.480
So if the US
Federal Reserve were

00:04:00.480 --> 00:04:04.770
to go and buy an asset
from a foreign government

00:04:04.770 --> 00:04:08.580
bank or individual,
let's say a foreign bond,

00:04:08.580 --> 00:04:11.760
than this number right
over here would increase.

00:04:11.760 --> 00:04:14.010
And actually, the way I've
classified right over here,

00:04:14.010 --> 00:04:16.480
government purchases, not
the US Federal Reserve,

00:04:16.480 --> 00:04:18.260
but the US government
actually still falls

00:04:18.260 --> 00:04:20.680
into this category, just the
way I set up the numbers.

00:04:20.680 --> 00:04:23.224
This right over here is
the Federal Reserve alone.

00:04:23.224 --> 00:04:24.890
Now with that of the
way, let's actually

00:04:24.890 --> 00:04:27.440
figure out whether we're
running a capital account

00:04:27.440 --> 00:04:29.570
deficit or a surplus.

00:04:29.570 --> 00:04:31.456
So let's get our
calculator back.

00:04:31.456 --> 00:04:33.330
Let me get it and I'll
put it right over here

00:04:33.330 --> 00:04:34.501
so we can see our numbers.

00:04:34.501 --> 00:04:36.000
And so let's think
about the inflow.

00:04:36.000 --> 00:04:37.700
So this is how much
more foreigners

00:04:37.700 --> 00:04:39.910
are buying of US stuff.

00:04:39.910 --> 00:04:42.710
So they're buying 625--
and when I say stuff,

00:04:42.710 --> 00:04:43.780
I'm talking about assets.

00:04:43.780 --> 00:04:45.540
I'm not talking about
goods and services.

00:04:45.540 --> 00:04:49.800
I'm talking about stocks
and bonds and real estate.

00:04:49.800 --> 00:04:53.410
So $625 billion.

00:04:53.410 --> 00:04:55.880
And then plus
another $165 billion

00:04:55.880 --> 00:04:58.520
if we talk about the official
purchases of governments

00:04:58.520 --> 00:04:59.870
and central banks.

00:04:59.870 --> 00:05:02.050
So this is how much
increased asset--

00:05:02.050 --> 00:05:03.690
this is the change
in assets purchased

00:05:03.690 --> 00:05:04.880
from foreigners in the US.

00:05:04.880 --> 00:05:08.500
So they have to put in
$790 billion into 2011

00:05:08.500 --> 00:05:10.140
to make those purchases.

00:05:10.140 --> 00:05:12.480
Well on the other side
of that, Americans

00:05:12.480 --> 00:05:14.870
went out and bought
$380 billion.

00:05:14.870 --> 00:05:17.350
And when I write- that's
just a previous answer.

00:05:17.350 --> 00:05:19.594
So we have $790 billion,
which is what's inflowing.

00:05:19.594 --> 00:05:21.010
And now this is
what's outflowing.

00:05:21.010 --> 00:05:24.140
$380 billion to buy
assets in other countries

00:05:24.140 --> 00:05:27.010
that the non-Federal
Reserve actors do.

00:05:27.010 --> 00:05:29.571
And then these are the assets
that the Federal Reserve also

00:05:29.571 --> 00:05:30.070
buys.

00:05:30.070 --> 00:05:32.930
But those are also
outflows of payments.

00:05:32.930 --> 00:05:35.830
And we are left
with $394 billion--

00:05:35.830 --> 00:05:38.050
a positive $394 billion.

00:05:38.050 --> 00:05:42.090
This is $394 billion larger
than this right over here.

00:05:42.090 --> 00:05:45.630
So we're running a
capital account surplus.

00:05:45.630 --> 00:05:47.650
Let me write that.

00:05:47.650 --> 00:06:00.180
So we end up with a
capital account surplus,

00:06:00.180 --> 00:06:04.200
and it shows you how good--
what was it? $394 billion.

00:06:07.320 --> 00:06:09.504
And so you see that these
numbers are pretty close.

00:06:09.504 --> 00:06:11.170
And now I'm going to
tell you something,

00:06:11.170 --> 00:06:12.720
and hopefully in
future videos you'll

00:06:12.720 --> 00:06:15.410
understand why this is happening
in a little bit more depth.

00:06:15.410 --> 00:06:16.785
But these numbers
actually should

00:06:16.785 --> 00:06:18.484
have been the exact same thing.

00:06:18.484 --> 00:06:19.900
These numbers
should have actually

00:06:19.900 --> 00:06:21.310
been the exact
same thing, but we

00:06:21.310 --> 00:06:23.480
see that they're off
by about, what is it?

00:06:23.480 --> 00:06:25.410
They're off by
about $80 billion.

00:06:25.410 --> 00:06:26.520
So let me write this down.

00:06:26.520 --> 00:06:29.550
We have and $80
billion discrepancy.

00:06:29.550 --> 00:06:32.330
And for most people, that's
a fairly large discrepancy.

00:06:32.330 --> 00:06:34.020
But if we're talking
about an economy

00:06:34.020 --> 00:06:35.724
the size of the
United States, that's

00:06:35.724 --> 00:06:37.140
on the order of
$15 trillion, it's

00:06:37.140 --> 00:06:40.307
not that huge of a discrepancy.

00:06:40.307 --> 00:06:42.890
And you have to think about how
all of this stuff is measured.

00:06:42.890 --> 00:06:43.890
They have to do surveys.

00:06:43.890 --> 00:06:45.295
They sample things.

00:06:45.295 --> 00:06:46.670
They're getting
all these numbers

00:06:46.670 --> 00:06:48.020
from all different sources.

00:06:48.020 --> 00:06:49.686
And so it's actually
reasonable that you

00:06:49.686 --> 00:06:52.439
would have some form of
statistical discrepancy.

00:06:52.439 --> 00:06:54.480
And that's actually what
this is right over here.

00:06:54.480 --> 00:06:58.390
This is a statistical
discrepancy.

00:06:58.390 --> 00:07:01.820
In theory, these numbers
should be the exact amount.

00:07:01.820 --> 00:07:04.440
If you're running a current
account deficit then

00:07:04.440 --> 00:07:07.530
you should have that exact same
amount in the capital account

00:07:07.530 --> 00:07:08.860
surplus, and vice versa.

00:07:08.860 --> 00:07:11.090
If you have a capital
account deficit then

00:07:11.090 --> 00:07:13.929
you would have to be running
a current account surplus.

00:07:13.929 --> 00:07:15.720
We'll talk more about
why that makes sense,

00:07:15.720 --> 00:07:16.950
although I encourage
you to think about it.

00:07:16.950 --> 00:07:18.366
Think about it
right now, why that

00:07:18.366 --> 00:07:20.870
makes sense, and the difference
between these numbers.

00:07:20.870 --> 00:07:22.730
This is just a
statistical discrepancy

00:07:22.730 --> 00:07:25.532
by the Bureau of
Economic Analysis.


Balance of payments: Current account

WEBVTT
Kind: captions
Language: en

00:00:00.854 --> 00:00:02.280
- [Instructor] What we are going to try

00:00:02.280 --> 00:00:04.720
to understand in this video

00:00:04.720 --> 00:00:08.970
is the balance of payments.

00:00:08.970 --> 00:00:11.800
And it's really how a country accounts for

00:00:11.800 --> 00:00:15.680
the different ways that money
is flowing into the country

00:00:15.680 --> 00:00:17.360
or payments are happening into a country

00:00:17.360 --> 00:00:20.630
or payments are happening
outside of a country.

00:00:20.630 --> 00:00:22.860
And right over here, I have information

00:00:22.860 --> 00:00:25.380
for the United States in 2011,

00:00:25.380 --> 00:00:27.100
all of the numbers right over here

00:00:27.100 --> 00:00:28.990
are denominated in dollars.

00:00:28.990 --> 00:00:32.290
And in green I have all of
the reasons why currency

00:00:32.290 --> 00:00:34.790
or why payments would be made to the US

00:00:34.790 --> 00:00:36.260
either the government of the US,

00:00:36.260 --> 00:00:37.960
the federal reserve of the US,

00:00:37.960 --> 00:00:40.000
or to citizens of the US.

00:00:40.000 --> 00:00:41.770
And in orange, I have all the reasons

00:00:41.770 --> 00:00:45.560
why payments would be made
to folks outside of the US,

00:00:45.560 --> 00:00:47.370
either the government, central banks,

00:00:47.370 --> 00:00:49.000
or private citizens.

00:00:49.000 --> 00:00:51.600
And for this video, I'm
going to first focus

00:00:51.600 --> 00:00:54.460
on the left hand, these
reasons right over here.

00:00:54.460 --> 00:00:58.270
And this you could view,
this is the current account.

00:00:58.270 --> 00:00:59.350
The current account.

00:00:59.350 --> 00:01:01.620
And the current account focuses on things

00:01:01.620 --> 00:01:04.230
related to trade, so exports and imports,

00:01:04.230 --> 00:01:06.640
things related to income in that period,

00:01:06.640 --> 00:01:09.540
so if I'm getting dividends from a stock

00:01:09.540 --> 00:01:12.130
that's a German company
or if someone in Germany

00:01:12.130 --> 00:01:13.510
is getting dividends from a stock

00:01:13.510 --> 00:01:14.630
that's an American company,

00:01:14.630 --> 00:01:16.440
and just transfers of money.

00:01:16.440 --> 00:01:19.740
I give money to my mom in
France to help support her.

00:01:19.740 --> 00:01:23.350
So that's what factored
in in the current account.

00:01:23.350 --> 00:01:26.420
In the next video, we will
talk about the capital account,

00:01:26.420 --> 00:01:29.076
the capital account, which focuses

00:01:29.076 --> 00:01:33.680
on transfers or payments that are due to

00:01:33.680 --> 00:01:36.240
changes in ownership of assets

00:01:36.240 --> 00:01:37.920
and we'll see how they all balance out

00:01:37.920 --> 00:01:40.460
either in the next video or
maybe the video after that.

00:01:40.460 --> 00:01:43.880
But let's first focus
on the current account.

00:01:43.880 --> 00:01:46.320
So in green, I have all the reasons why

00:01:46.320 --> 00:01:51.140
the US got payments from the
rest of the world in 2011.

00:01:51.140 --> 00:01:53.150
So the first one right
over here is exports.

00:01:53.150 --> 00:01:55.620
You can imagine if we are exporting,

00:01:55.620 --> 00:01:57.830
and this is in billions, so this is 2.1,

00:01:57.830 --> 00:02:00.620
this is 2,105 billion
which is the same thing

00:02:00.620 --> 00:02:02.450
as 2.1 trillion.

00:02:02.450 --> 00:02:04.980
If we're exporting 2.1 trillion dollars

00:02:04.980 --> 00:02:07.820
worth of goods and services,
then the rest of the world

00:02:07.820 --> 00:02:09.760
is going to have to pay that much to us.

00:02:09.760 --> 00:02:11.150
So this is going to be an inflow,

00:02:11.150 --> 00:02:12.280
this is going to be a payment,

00:02:12.280 --> 00:02:14.560
this is a reason why we have more dollars

00:02:14.560 --> 00:02:17.590
after all the appropriate
currency transactions take place,

00:02:17.590 --> 00:02:20.550
why more dollars have to come to the US,

00:02:20.550 --> 00:02:23.070
either to US private
citizens, to the government,

00:02:23.070 --> 00:02:24.760
or to the federal reserve.

00:02:24.760 --> 00:02:26.660
And for the most part, this is going to be

00:02:26.660 --> 00:02:30.330
for private citizens or corporations.

00:02:30.330 --> 00:02:33.100
And this right over here is income

00:02:33.100 --> 00:02:37.200
that Americans get from
owning assets abroad

00:02:37.200 --> 00:02:38.400
in other countries.

00:02:38.400 --> 00:02:41.030
So imagine that I, I'm
an American citizen,

00:02:41.030 --> 00:02:43.400
I own an apartment complex in London,

00:02:43.400 --> 00:02:45.510
the folks in London have
to pay rent on that,

00:02:45.510 --> 00:02:47.620
I convert that rent to
dollars and I bring it back

00:02:47.620 --> 00:02:50.060
to the US, that would be
an income receipt to me.

00:02:50.060 --> 00:02:52.360
It's the reason why currency or payments

00:02:52.360 --> 00:02:54.580
are being made to the US.

00:02:54.580 --> 00:02:56.520
And so once again, that's why I've colored

00:02:56.520 --> 00:02:58.480
these right over here in green.

00:02:58.480 --> 00:03:01.270
Now let's think about the
other side of that coin.

00:03:01.270 --> 00:03:02.780
Obviously, we're not just selling stuff

00:03:02.780 --> 00:03:04.540
to the rest of the world,
the rest of the world

00:03:04.540 --> 00:03:05.910
is selling stuff to us.

00:03:05.910 --> 00:03:08.490
And that's what imports are factoring in

00:03:08.490 --> 00:03:11.200
and the US actually runs a trade deficit.

00:03:11.200 --> 00:03:14.440
It imports more than
it exports to the tune,

00:03:14.440 --> 00:03:17.730
if we wanted to round, of
about 2.7 trillion dollars.

00:03:17.730 --> 00:03:19.990
And once again, if we're
buying other people's goods

00:03:19.990 --> 00:03:22.740
and services, we needed
to make payments to them.

00:03:22.740 --> 00:03:24.600
Currency needs to go to them.

00:03:24.600 --> 00:03:26.270
And so you see it's to the tune,

00:03:26.270 --> 00:03:28.950
and that's why I wrote it
right over here of in orange.

00:03:28.950 --> 00:03:30.870
And once again, income payments,

00:03:30.870 --> 00:03:32.320
other side of income receipts.

00:03:32.320 --> 00:03:35.600
This is foreigners owning
assets in the United States.

00:03:35.600 --> 00:03:39.370
If a foreigner owns a pizza
parlor in the United States,

00:03:39.370 --> 00:03:43.170
that pizza parlor makes a
$100,000 in a given year,

00:03:43.170 --> 00:03:46.300
and that $100,000 will
go to that foreigner,

00:03:46.300 --> 00:03:48.610
it will be an income payment.

00:03:48.610 --> 00:03:50.990
And so that's what this
factors in right over here.

00:03:50.990 --> 00:03:53.020
This is income on foreign-owned assets.

00:03:53.020 --> 00:03:54.260
It does not go into an American.

00:03:54.260 --> 00:03:55.560
It does not go to the American government

00:03:55.560 --> 00:03:57.070
or private citizen or corporation

00:03:57.070 --> 00:03:58.140
or the federal reserve.

00:03:58.140 --> 00:04:01.110
It goes to someone outside of the country.

00:04:01.110 --> 00:04:03.140
And so this would be
an outflow of payments

00:04:03.140 --> 00:04:04.420
outside of the country.

00:04:04.420 --> 00:04:06.880
And so this last part right over here,

00:04:06.880 --> 00:04:08.730
this is net transfers.

00:04:08.730 --> 00:04:11.350
This is literally just on a net basis,

00:04:11.350 --> 00:04:14.520
Americans giving money away
to the rest of the world.

00:04:14.520 --> 00:04:17.430
And it actually since
Americans give away more

00:04:17.430 --> 00:04:19.330
than they receive from
the rest of the world,

00:04:19.330 --> 00:04:20.530
we're not talking about transactions,

00:04:20.530 --> 00:04:23.450
this is kind of just pure
I'm an American citizen,

00:04:23.450 --> 00:04:25.950
I give money to my mom and friends,

00:04:25.950 --> 00:04:27.480
or this could even be foreign aid,

00:04:27.480 --> 00:04:29.915
the US government giving aid to a country,

00:04:29.915 --> 00:04:32.730
and since the US does give
more than it receives,

00:04:32.730 --> 00:04:34.890
we just write it down
on a net transfer basis

00:04:34.890 --> 00:04:38.390
and it is right over here a net outflow.

00:04:38.390 --> 00:04:40.460
And so we can figure out looking at this,

00:04:40.460 --> 00:04:42.769
while just based on these causes,

00:04:42.769 --> 00:04:46.200
the trade deficit, the income receipts,

00:04:46.200 --> 00:04:48.310
and the net transfers, where the US

00:04:48.310 --> 00:04:50.350
is transferring more currency abroad

00:04:50.350 --> 00:04:52.630
or getting more currency onto,

00:04:52.630 --> 00:04:55.130
I guess you could say, into its ownership.

00:04:55.130 --> 00:04:57.493
And to do that, let's
get our calculator out.

00:04:58.550 --> 00:04:59.990
Let me get the calculator out.

00:04:59.990 --> 00:05:00.930
And so let's think.

00:05:00.930 --> 00:05:03.150
Okay, so this is all of the money

00:05:03.150 --> 00:05:04.060
that we are getting.

00:05:04.060 --> 00:05:06.510
These are the payments, these
are the inflows to the US.

00:05:06.510 --> 00:05:10.490
So let's add those up, 2,105 billion

00:05:10.490 --> 00:05:14.070
plus 739 billion,

00:05:14.070 --> 00:05:16.810
and now let's subtract
out all of the outflows

00:05:16.810 --> 00:05:19.220
of capital or I should
say all of the outflows

00:05:19.220 --> 00:05:21.450
of currency from the US.

00:05:21.450 --> 00:05:23.610
All of the payments that go out of the US.

00:05:23.610 --> 00:05:25.960
So let's subtract, so the
payments we have to make

00:05:25.960 --> 00:05:29.700
due to imports, so 2.7 trillion

00:05:29.700 --> 00:05:33.410
and then we have the 518 billion of income

00:05:33.410 --> 00:05:35.680
that foreigners make on US assets.

00:05:35.680 --> 00:05:39.620
And then finally, or
foreign-owned assets of the US,

00:05:39.620 --> 00:05:41.140
or in the US I should say,

00:05:41.140 --> 00:05:43.710
and then the money that
the US just gives away

00:05:43.710 --> 00:05:45.820
to the rest of the world on a net basis.

00:05:45.820 --> 00:05:49.190
And you see here, when you just
look at the current account,

00:05:49.190 --> 00:05:52.240
the US is running a
current account deficit.

00:05:52.240 --> 00:05:56.700
For just these causes alone,
the US is making more payments

00:05:56.700 --> 00:05:58.053
than it is receiving.

00:06:00.244 --> 00:06:04.160
And it's to the tune
of 474 billion dollars.

00:06:04.160 --> 00:06:05.870
So let me write it right over here.

00:06:05.870 --> 00:06:07.760
So our current account,

00:06:07.760 --> 00:06:09.177
current account deficit

00:06:15.430 --> 00:06:17.786
is to the tune, I already
forgot the number,

00:06:17.786 --> 00:06:22.490
474 billion dollars.

00:06:22.490 --> 00:06:24.450
If that number was
positive, I would call it

00:06:24.450 --> 00:06:27.893
a current account surplus.


Free throwing probability

WEBVTT
Kind: captions
Language: en

00:00:03.312 --> 00:00:04.520
LEBRON JAMES: Hey, everybody.

00:00:04.520 --> 00:00:05.620
It's LeBron here.

00:00:05.620 --> 00:00:07.800
I got a quick brain
teaser for you.

00:00:07.800 --> 00:00:11.060
What are the odds of making
10 free throws in a row?

00:00:11.060 --> 00:00:14.139
Here's my good friend,
Sal, with the answer.

00:00:14.139 --> 00:00:15.680
SAL: That's a great
question, LeBron.

00:00:15.680 --> 00:00:17.930
And I think the answer
might surprise you.

00:00:17.930 --> 00:00:21.280
So I looked up your career
free throw percentage,

00:00:21.280 --> 00:00:25.290
and you're right around 75%,
which is a little bit higher

00:00:25.290 --> 00:00:27.070
than my free throw percentage.

00:00:27.070 --> 00:00:30.585
And one way to interpret that,
if we have a million LeBron

00:00:30.585 --> 00:00:33.210
Jameses, as you can imagine, any
large number of LeBron Jameses

00:00:33.210 --> 00:00:34.407
is taking a free throw.

00:00:34.407 --> 00:00:36.740
So let's say that this line
represents all of the LeBron

00:00:36.740 --> 00:00:38.760
Jameses that take
that first free throw.

00:00:38.760 --> 00:00:42.160
Let's call that free
throw number one.

00:00:42.160 --> 00:00:45.630
We would expect, on
average, that 75% of them

00:00:45.630 --> 00:00:48.250
would make that
first free throw.

00:00:48.250 --> 00:00:50.060
So let me draw 75%.

00:00:50.060 --> 00:00:51.790
So this is about half way.

00:00:51.790 --> 00:00:53.190
This would be 25.

00:00:53.190 --> 00:00:54.900
This would get us to 75.

00:00:54.900 --> 00:00:58.410
So we would expect
75% of them would

00:00:58.410 --> 00:01:00.360
make that first free throw.

00:01:00.360 --> 00:01:02.250
75%.

00:01:02.250 --> 00:01:05.710
And then the other 25% we
would expect, on average,

00:01:05.710 --> 00:01:07.620
would miss that
first free throw.

00:01:07.620 --> 00:01:09.120
Now, what we care
about are the ones

00:01:09.120 --> 00:01:10.580
that keep making
the free throws.

00:01:10.580 --> 00:01:12.390
We want 10 in a row.

00:01:12.390 --> 00:01:15.350
So let's just focus on the
75% that made the first one.

00:01:15.350 --> 00:01:17.272
Some of these 25%
might make some free

00:01:17.272 --> 00:01:19.730
throws going forward, but we
don't care about them anymore.

00:01:19.730 --> 00:01:21.550
They're kind of out of the game.

00:01:21.550 --> 00:01:23.250
So let's go to free
throw number two.

00:01:26.540 --> 00:01:28.980
What percentage of
the folks who made,

00:01:28.980 --> 00:01:31.549
of the LeBron Jameses, that
made that first free throw,

00:01:31.549 --> 00:01:33.840
what percentage would we
expect to make the second one?

00:01:33.840 --> 00:01:36.090
We're going to assume
that whether or not

00:01:36.090 --> 00:01:38.436
you made the first one has
no bearing on the probability

00:01:38.436 --> 00:01:40.310
of you making the second,
that this continues

00:01:40.310 --> 00:01:43.750
to be the probability of a
LeBron James making a given

00:01:43.750 --> 00:01:44.680
free throw.

00:01:44.680 --> 00:01:47.650
So we would expect 75%
of these LeBron Jameses

00:01:47.650 --> 00:01:49.740
to also make the second one.

00:01:49.740 --> 00:01:52.790
So we're going to
take 75% of 75%.

00:01:52.790 --> 00:01:54.870
So this is about
half of that 75%.

00:01:54.870 --> 00:01:56.390
This would be a quarter.

00:01:56.390 --> 00:02:00.870
This would be 3/4,
which is exactly 75%.

00:02:00.870 --> 00:02:02.600
So right over here.

00:02:02.600 --> 00:02:05.770
So this represents,
of the ones that

00:02:05.770 --> 00:02:08.169
made the first one, how many
also made the second one.

00:02:08.169 --> 00:02:10.580
So you could say the percentage
of the LeBron Jameses

00:02:10.580 --> 00:02:13.370
that we would expect on
average to make the first two

00:02:13.370 --> 00:02:14.000
free throws.

00:02:14.000 --> 00:02:16.340
So this length
right over here is

00:02:16.340 --> 00:02:24.700
75% of 75%, 75% of this
75% right over there.

00:02:24.700 --> 00:02:27.370
And I think you might begin
to see a pattern emerging.

00:02:27.370 --> 00:02:29.160
Let's go to the
third free throw.

00:02:29.160 --> 00:02:31.590
Free throw number three.

00:02:31.590 --> 00:02:33.117
So what percentage
of these folks

00:02:33.117 --> 00:02:34.450
are going to make the third one?

00:02:34.450 --> 00:02:37.130
Well, 75% of them are going
to make the third one.

00:02:37.130 --> 00:02:42.210
So 75% are going to
make the third one.

00:02:42.210 --> 00:02:43.400
So what is this going to be?

00:02:43.400 --> 00:02:49.230
This is going to be
75% of this number,

00:02:49.230 --> 00:02:52.303
of this length,
which is 75% of 75%.

00:02:57.220 --> 00:03:00.090
And if you were to go all the
way to free throw number 10,

00:03:00.090 --> 00:03:01.800
and I think you see
the pattern here,

00:03:01.800 --> 00:03:04.210
if we were to go all the way
to free throw number 10-- so

00:03:04.210 --> 00:03:05.880
I'm just skipping a bunch.

00:03:05.880 --> 00:03:09.360
And we're going to get some
very, very, very small fraction

00:03:09.360 --> 00:03:11.700
that have made all
10, it's essentially

00:03:11.700 --> 00:03:16.650
going to be 75% times
75% times 75% 10 times.

00:03:16.650 --> 00:03:21.060
75% being multiplied
repeatedly 10 times.

00:03:21.060 --> 00:03:23.170
So this is going to be
what we're left off with.

00:03:23.170 --> 00:03:28.950
It's going to be 75% times 75%
and let me copy and paste this

00:03:28.950 --> 00:03:32.410
so it just doesn't take forever.

00:03:32.410 --> 00:03:37.550
So copy and then paste it.

00:03:37.550 --> 00:03:39.900
So times out-- I'll put the
multiplication signs later.

00:03:39.900 --> 00:03:50.490
So that's 4, that's
6, that's 8, and then

00:03:50.490 --> 00:03:55.510
that is 10 right over there and
let me throw the multiplication

00:03:55.510 --> 00:03:56.270
signs in there.

00:03:56.270 --> 00:04:00.560
So times, times, times, times.

00:04:00.560 --> 00:04:03.360
So this little fraction
that made all 10 of them

00:04:03.360 --> 00:04:05.725
is going to be equal to this
value right over here 75%.

00:04:05.725 --> 00:04:06.350
So let's see.

00:04:06.350 --> 00:04:09.752
1, 2, 3, 4, 5, 6, 7, 8, 9, 10.

00:04:09.752 --> 00:04:14.070
75% being repeatedly
multiplied 10 times.

00:04:14.070 --> 00:04:17.221
Now this would obviously take
me forever to do it by hand.

00:04:17.221 --> 00:04:19.720
And even on a calculator, if I
were to punch all of this in,

00:04:19.720 --> 00:04:20.959
I might make a mistake.

00:04:20.959 --> 00:04:24.160
But lucky for us, there
is a mathematical operator

00:04:24.160 --> 00:04:26.610
that is essentially a
repeated multiplication,

00:04:26.610 --> 00:04:28.360
and that's taking an exponent.

00:04:28.360 --> 00:04:31.860
So another way of writing
that right over there,

00:04:31.860 --> 00:04:37.280
we could write that as
75% to the 10th power,

00:04:37.280 --> 00:04:40.290
repeatedly multiplying
75% 10 times.

00:04:40.290 --> 00:04:42.610
These are the same expression.

00:04:42.610 --> 00:04:50.410
And 75%, the word percent
literally means per 100.

00:04:50.410 --> 00:04:52.630
You might recognize
the root word cent

00:04:52.630 --> 00:04:53.820
from things like century.

00:04:53.820 --> 00:04:55.500
100 years in a century.

00:04:55.500 --> 00:04:57.270
100 cents in $1.

00:04:57.270 --> 00:04:59.100
So this literally means per 100.

00:04:59.100 --> 00:05:02.480
So we could write
this as 75 over 100

00:05:02.480 --> 00:05:08.040
to the 10th power, which
is the same thing as 0.75

00:05:08.040 --> 00:05:09.606
to the 10th power.

00:05:09.606 --> 00:05:10.980
Now, let's get
our calculator out

00:05:10.980 --> 00:05:13.040
and see what this evaluates to.

00:05:13.040 --> 00:05:21.540
So 0.75 to the 10th
power gets us to 0.056,

00:05:21.540 --> 00:05:23.522
and I'll just round to
the nearest hundredths.

00:05:23.522 --> 00:05:25.230
So if we round to the
nearest hundredths,

00:05:25.230 --> 00:05:29.690
that gets us to 0.06.

00:05:29.690 --> 00:05:32.820
So this is roughly
equal to, if we

00:05:32.820 --> 00:05:36.490
round to the nearest
hundredths, 0.06,

00:05:36.490 --> 00:05:39.320
which is equal to
roughly, when we round,

00:05:39.320 --> 00:05:43.237
a 6% probability of making
10 free throws in a row.

00:05:43.237 --> 00:05:45.820
Which even though you have quite
a high free throw percentage,

00:05:45.820 --> 00:05:47.870
this is not that high
of a probability.

00:05:47.870 --> 00:05:51.740
It's a little bit better
than a 1 in 20 chance.

00:05:51.740 --> 00:05:53.630
Now, what I want
to throw out there,

00:05:53.630 --> 00:05:55.560
for everyone else
watching this, is

00:05:55.560 --> 00:05:58.100
to think about how we can
make a general statement

00:05:58.100 --> 00:05:59.110
about anybody.

00:05:59.110 --> 00:06:00.860
If anybody has some
free throw percentage,

00:06:00.860 --> 00:06:02.210
and they want to say,
what's the probability

00:06:02.210 --> 00:06:03.126
of making 10 in a row?

00:06:03.126 --> 00:06:04.330
How can we say that?

00:06:04.330 --> 00:06:07.390
Well, I think you saw the
pattern right over here.

00:06:07.390 --> 00:06:13.460
The probability of
making-- let's call

00:06:13.460 --> 00:06:15.580
it n where n is a
number of free throws

00:06:15.580 --> 00:06:22.190
we care about-- n free
throws in a row for somebody.

00:06:22.190 --> 00:06:24.400
And we're not just
talking about LeBron here.

00:06:24.400 --> 00:06:28.300
It's going to be their
free throw percentage--

00:06:28.300 --> 00:06:32.090
in this case, LeBron's was 75%--
to the number of free throws

00:06:32.090 --> 00:06:33.600
that we want to get in a row.

00:06:33.600 --> 00:06:36.200
So to the nth power.

00:06:36.200 --> 00:06:38.059
So for example, you
might want to play along

00:06:38.059 --> 00:06:39.600
with their own free
throw percentage.

00:06:39.600 --> 00:06:41.266
If your free throw
percentage, let's say

00:06:41.266 --> 00:06:44.400
it's 60%, which is
the same thing as 0.6.

00:06:44.400 --> 00:06:46.510
So let's say you have a
60% free throw percentage,

00:06:46.510 --> 00:06:48.551
and you want to see your
probability of getting 5

00:06:48.551 --> 00:06:51.784
in a row, you would take
that to the fifth power.

00:06:51.784 --> 00:06:54.200
And you'd get what looks like,
if you round to the nearest

00:06:54.200 --> 00:06:56.060
hundredths, it
would be about 8%.

00:06:56.060 --> 00:06:58.720
So I encourage you to try
this with different free throw

00:06:58.720 --> 00:07:01.330
percentages and different
numbers of free throws

00:07:01.330 --> 00:07:04.540
that you're attempting
to get in a row.


Government spending and the IS-LM model

WEBVTT
Kind: captions
Language: en

00:00:00.603 --> 00:00:03.270
Let's think about what
happens to an IS curve

00:00:03.270 --> 00:00:08.104
when government spending goes up.

00:00:08.104 --> 00:00:13.183
To think about that, let's
first draw our Keynesian cross.

00:00:13.183 --> 00:00:16.210
On the vertical axis over here,

00:00:16.210 --> 00:00:19.014
we have aggregate expenditures.

00:00:19.014 --> 00:00:20.836
In the horizontal axis right over here,

00:00:20.836 --> 00:00:22.381
wee have aggregate income.

00:00:22.381 --> 00:00:23.625
These are really just 2 ways

00:00:23.625 --> 00:00:25.718
of talking about GDP.

00:00:25.718 --> 00:00:27.789
We are thinking, we actually
want all of the points

00:00:27.789 --> 00:00:29.386
where the economies and equilibrium

00:00:29.386 --> 00:00:31.599
where income is equal to expenditures.

00:00:31.599 --> 00:00:33.848
That's why we draw that line of slope 1,

00:00:33.848 --> 00:00:35.066
that's all of the points

00:00:35.066 --> 00:00:36.978
where income is equal expenditures.

00:00:36.978 --> 00:00:39.982
Where is economy is in
some type of equilibrium

00:00:39.982 --> 00:00:41.483
or in equilibrium.

00:00:41.483 --> 00:00:43.394
Then we think about planned expenditures.

00:00:43.394 --> 00:00:47.648
Planned expenditures, we've
done this multiple times,

00:00:47.648 --> 00:00:51.118
it's equal to aggregate consumer spending

00:00:51.118 --> 00:00:55.318
which is a function of income minus taxes.

00:00:55.318 --> 00:00:57.451
Or it's a function of disposable income.

00:00:57.451 --> 00:00:59.394
We're not seeing C x Y - T,

00:00:59.394 --> 00:01:02.230
we're seeing C is a function of Y - T.

00:01:02.230 --> 00:01:04.313
This is one way of talking
about consumption function.

00:01:04.313 --> 00:01:06.811
We assume it's linear in
this video and another

00:01:06.811 --> 00:01:07.918
but it's doesn't have to be,

00:01:07.918 --> 00:01:09.316
it could be a curve of some kind.

00:01:09.316 --> 00:01:12.253
Then we have our planned investment,

00:01:12.253 --> 00:01:14.479
plus planned investment

00:01:14.479 --> 00:01:18.445
which we're assuming that
we're sitting at some,

00:01:18.445 --> 00:01:21.515
that our real interest
rates are fixed right now.

00:01:21.515 --> 00:01:26.315
Planned investment plus
government spending

00:01:26.315 --> 00:01:29.315
and then we could even
throw net exports out there

00:01:29.315 --> 00:01:31.935
if we assume that we have
some type of an open economy.

00:01:31.935 --> 00:01:34.105
This curve, our plan investment,

00:01:34.105 --> 00:01:36.602
this is all a review of
the Keynesian cross videos,

00:01:36.602 --> 00:01:40.666
it might look something like this

00:01:40.666 --> 00:01:46.514
and we get to our
equilibrium level of GDP.

00:01:46.514 --> 00:01:48.782
We can also use this information

00:01:48.782 --> 00:01:51.321
given that we were sitting
here at interest rate r1

00:01:51.321 --> 00:01:56.451
to start, to at least plot
one point on our IS curve.

00:01:56.451 --> 00:01:59.185
Let's draw at least point on our IS curve

00:01:59.185 --> 00:02:02.119
and hopefully you feel good
about the general shape of it

00:02:02.119 --> 00:02:05.450
and then we could think about
how the IS curve might shift.

00:02:05.450 --> 00:02:07.387
Here, we have real interest rates.

00:02:07.387 --> 00:02:09.014
We're trying to relate real interest rates

00:02:09.014 --> 00:02:11.266
to aggregate GDP.

00:02:11.266 --> 00:02:13.847
We just showed that
when real interest rates

00:02:13.847 --> 00:02:14.844
are sitting at r1,

00:02:14.844 --> 00:02:19.592
if this is r1 right over here.

00:02:19.592 --> 00:02:21.323
If real interest rates are sitting at r1,

00:02:21.323 --> 00:02:24.097
we know that the aggregate
level of output or income

00:02:24.097 --> 00:02:25.852
is that point right over there.

00:02:25.852 --> 00:02:27.379
We could just drop that down

00:02:27.379 --> 00:02:30.781
and so it is this level right over here.

00:02:30.781 --> 00:02:34.094
When real interest rates
are r1 this is our output.

00:02:34.094 --> 00:02:37.182
That is a point on our IS curve.

00:02:37.182 --> 00:02:39.782
We can draw the entire IS curve

00:02:39.782 --> 00:02:46.051
which might look something like that,

00:02:46.051 --> 00:02:47.513
that is our entire IS curve.

00:02:47.513 --> 00:02:49.045
If we kept changing this,

00:02:49.045 --> 00:02:52.113
if we kept trying this out for
different real interest rates

00:02:52.113 --> 00:02:53.426
we could plot more and more

00:02:53.426 --> 00:02:56.181
of these points along the IS curve.

00:02:56.181 --> 00:02:58.848
This is really thinking in terms of,

00:02:58.848 --> 00:03:01.320
if real interest rates go up

00:03:01.320 --> 00:03:03.594
then this whole expression will go down

00:03:03.594 --> 00:03:05.432
then this thing will be shifted down

00:03:05.432 --> 00:03:08.098
and so we would have less GDP.

00:03:08.098 --> 00:03:10.096
If this gets shifted down

00:03:10.096 --> 00:03:12.312
your equilibrium GDP might go over here.

00:03:12.312 --> 00:03:14.051
At a higher real interest rate

00:03:14.051 --> 00:03:17.116
you would have lower aggregate income.

00:03:17.116 --> 00:03:19.433
That's how we actually thought
about plotting our IS curve.

00:03:19.433 --> 00:03:22.260
Now, with all of that out of the way,

00:03:22.260 --> 00:03:23.853
let's think about what happens

00:03:23.853 --> 00:03:25.782
when government spending goes up.

00:03:25.782 --> 00:03:28.683
Well, if government spending goes up,

00:03:28.683 --> 00:03:30.804
if this piece right over here goes up,

00:03:30.804 --> 00:03:35.517
that will shift our planned
expenditures up as well.

00:03:35.517 --> 00:03:39.150
So your change in government
spending, change in G,

00:03:39.150 --> 00:03:41.319
it would shift this curve up.

00:03:41.319 --> 00:03:43.731
Let me draw that a little bit neater.

00:03:43.731 --> 00:03:45.652
It would shift this curve up

00:03:45.652 --> 00:03:49.486
and you would get to a new level of income

00:03:49.486 --> 00:03:52.070
or equilibrium level of real GDP.

00:03:52.070 --> 00:03:55.181
That amount, this delta Y

00:03:55.181 --> 00:03:56.852
which is this amount right over here.

00:03:56.852 --> 00:03:58.649
It's actually going to be
equal to the multiplier

00:03:58.649 --> 00:04:01.521
which is 1 minus the marginal
propensity to consume

00:04:01.521 --> 00:04:05.985
times our change in government spending.

00:04:05.985 --> 00:04:07.177
You don't have to worry
about this too much

00:04:07.177 --> 00:04:08.653
for the sake of this video,

00:04:08.653 --> 00:04:10.563
that's just a little bit of a review.

00:04:10.563 --> 00:04:12.583
The whole reason why I'm
going this is we're saying,

00:04:12.583 --> 00:04:14.855
"Look, assuming r1 didn't change

00:04:14.855 --> 00:04:18.766
"and when we increased government spending

00:04:18.766 --> 00:04:21.410
"it shifted GDP up by that amount."

00:04:21.410 --> 00:04:22.724
When you increase government spending,

00:04:22.724 --> 00:04:27.908
it shifted at r1, it
shifted it by that amount.

00:04:27.908 --> 00:04:30.532
Well, that would be true at
any of the real interest rates

00:04:30.532 --> 00:04:32.061
along the IS curve.

00:04:32.061 --> 00:04:34.419
In general, if you increase
government spending

00:04:34.419 --> 00:04:36.460
and you're not changing
any of this other stuff

00:04:36.460 --> 00:04:39.753
then the IS curve would
shift to the right.

00:04:39.753 --> 00:04:41.261
If you decreased government spending

00:04:41.261 --> 00:04:43.594
the IS curve would shift to the left.

00:04:43.594 --> 00:04:45.460
With that in our toolkit now,

00:04:45.460 --> 00:04:46.530
we can think about

00:04:46.530 --> 00:04:48.419
how a change in government spending

00:04:48.419 --> 00:04:52.417
might change our equilibrium
point in our IS-LM model.

00:04:52.417 --> 00:04:54.126
Let's do that.

00:04:54.126 --> 00:04:56.994
Once again, real interest rates.

00:04:56.994 --> 00:05:02.667
Here we have aggregate income or real GDP

00:05:02.667 --> 00:05:05.200
and then we have our IS curve.

00:05:05.200 --> 00:05:08.417
Our IS curve looks something like that.

00:05:08.417 --> 00:05:12.501
Our LM curve, I will do it in magenta.

00:05:12.501 --> 00:05:16.864
Our LM curve might look
something like that.

00:05:16.864 --> 00:05:19.664
So, if we have a increase
in government spending,

00:05:19.664 --> 00:05:24.083
we already saw the IS
curve shift to the right.

00:05:24.083 --> 00:05:25.414
I want to do that in the same color.

00:05:25.414 --> 00:05:26.468
It shift to the right

00:05:26.468 --> 00:05:29.003
and it might look something like that.

00:05:29.003 --> 00:05:33.458
If our old equilibrium real
interest rate was sitting here

00:05:33.458 --> 00:05:35.664
and equilibrium income was sitting here,

00:05:35.664 --> 00:05:38.129
we saw that by increasing
the government spending

00:05:38.129 --> 00:05:42.133
our new equilibrium GDP is higher

00:05:42.133 --> 00:05:45.597
and our new equilibrium
interest rate is higher

00:05:45.597 --> 00:05:47.927
just by the shift to the IS curve.

00:05:47.927 --> 00:05:49.004
Now, you might be saying,

00:05:49.004 --> 00:05:50.727
"Okay Sally, you've been
focusing on the IS curve

00:05:50.727 --> 00:05:52.799
"but does an increase
in government spending,

00:05:52.799 --> 00:05:55.126
"does it affect the LM curve?

00:05:55.126 --> 00:05:56.724
"A change in physical policy,

00:05:56.724 --> 00:05:58.419
"does that affect the LM curve?"

00:05:58.419 --> 00:05:59.746
We're not talking about
printing more money,

00:05:59.746 --> 00:06:01.794
we're talking about the
government spending more,

00:06:01.794 --> 00:06:03.498
increasing its budget.

00:06:03.498 --> 00:06:04.665
Remember, the LM curve,

00:06:04.665 --> 00:06:08.057
it's driven by people's
liquidity preferences.

00:06:08.057 --> 00:06:09.929
At different levels of GDP,

00:06:09.929 --> 00:06:11.669
how much do they want to hold money

00:06:11.669 --> 00:06:13.666
and how much would you
have to pay for them

00:06:13.666 --> 00:06:15.927
in terms of interest for
them to depart with it?

00:06:15.927 --> 00:06:17.661
How much interest are they willing to pay

00:06:17.661 --> 00:06:19.666
to get access to money at
different levels of GDP?

00:06:19.666 --> 00:06:21.831
That's not really impacted
by government spending,

00:06:21.831 --> 00:06:24.999
and it's also impacted
by the money supply,

00:06:24.999 --> 00:06:26.669
by the amount of money that are out there

00:06:26.669 --> 00:06:28.927
and just general levels of prices.

00:06:28.927 --> 00:06:30.395
You could start to think about,

00:06:30.395 --> 00:06:31.466
"Oh, doesn't government spending

00:06:31.466 --> 00:06:32.756
"affect the prices in the long run?"

00:06:32.756 --> 00:06:34.725
But if we just hold a lot
of those things constant

00:06:34.725 --> 00:06:35.927
especially in the short-term,

00:06:35.927 --> 00:06:38.127
especially if you hold prices constant,

00:06:38.127 --> 00:06:41.196
fiscal policy is not going
to change the LM curve.

00:06:41.196 --> 00:06:44.261
Monetary policy, the money
supply part, that could

00:06:44.261 --> 00:06:46.597
or people's liquidity preferences could.

00:06:46.597 --> 00:06:48.393
But just government policy by itself,

00:06:48.393 --> 00:06:51.003
fiscal policy by itself won't change it.

00:06:51.003 --> 00:06:55.468
In this model, just not trying
to get too over-complicated.

00:06:55.468 --> 00:06:59.528
When government spending
goes up, when G goes up,

00:06:59.528 --> 00:07:01.329
it would shift the IS curve to the right.

00:07:01.329 --> 00:07:03.084
Increase in real interest rates,

00:07:03.084 --> 00:07:07.084
increase in real GDP
according to this model.


LM part of the IS-LM model

WEBVTT
Kind: captions
Language: en

00:00:00.678 --> 00:00:02.888
We've already studied the
IS curve in some detail

00:00:02.888 --> 00:00:04.801
and just a bit of a review here,

00:00:04.801 --> 00:00:09.675
it's just relating real
interest rates to real GDP.

00:00:09.675 --> 00:00:13.713
Let me just write that as Y, real GDP.

00:00:13.713 --> 00:00:16.807
The relationship, there's
2 ways we've viewed it;

00:00:16.807 --> 00:00:19.133
one is real interest
rates driving investment

00:00:19.133 --> 00:00:21.299
which drives real GDP

00:00:21.299 --> 00:00:22.627
or I should say real interest rates

00:00:22.627 --> 00:00:27.266
driving planned investments
which drives real GDP.

00:00:27.266 --> 00:00:29.403
If you have a high real interest rate

00:00:29.403 --> 00:00:31.405
then you're not going to
have as much plan investment

00:00:31.405 --> 00:00:33.132
and if you looked at our Keynesian cross,

00:00:33.132 --> 00:00:34.715
it's pretty clear

00:00:34.715 --> 00:00:35.871
that if you don't have as
high planned investment

00:00:35.871 --> 00:00:38.881
you will not have as high of a GDP

00:00:38.881 --> 00:00:41.473
or high of a real GDP.

00:00:41.473 --> 00:00:44.138
Similarly, if you have a
lower real interest rate

00:00:44.138 --> 00:00:45.966
you'll have more planned investment

00:00:45.966 --> 00:00:48.409
and then you will have a higher real GDP.

00:00:48.409 --> 00:00:51.865
Our IS curve looks like this.

00:00:51.880 --> 00:00:54.911
Our IS curve is downward sloping.

00:00:54.911 --> 00:00:57.204
It's easier for me to draw a dotted line.

00:00:57.204 --> 00:00:59.902
Right over there is our IS curve,

00:00:59.902 --> 00:01:02.411
stands for investment savings curve.

00:01:02.411 --> 00:01:03.823
This right here is taking it much more

00:01:03.823 --> 00:01:05.331
from the investment side,

00:01:05.331 --> 00:01:07.331
how real interest rates drive investment.

00:01:07.331 --> 00:01:09.268
You could also view it
from the other angle.

00:01:09.268 --> 00:01:14.273
You could view how real GDP drives savings

00:01:14.273 --> 00:01:16.128
which drives interest rates.

00:01:16.128 --> 00:01:18.664
That interpretation, at low levels of GDP

00:01:18.664 --> 00:01:19.933
you have less savings.

00:01:19.933 --> 00:01:23.670
That's essentially there
is less excess capital

00:01:23.670 --> 00:01:26.322
to go around and so it is scarce.

00:01:26.322 --> 00:01:27.998
The price of that is expensive

00:01:27.998 --> 00:01:30.934
and the price of money is interest rates

00:01:30.934 --> 00:01:33.331
and if we're dealing in real
terms, real interest rates

00:01:33.331 --> 00:01:34.664
and so it would be high.

00:01:34.664 --> 00:01:36.598
If you have higher GDP

00:01:36.598 --> 00:01:38.411
and everything else is held constant,

00:01:38.411 --> 00:01:40.601
if government spending is held constant,

00:01:40.601 --> 00:01:42.203
consumer spending will go up

00:01:42.203 --> 00:01:44.328
but it won't go up as high as GDP.

00:01:44.328 --> 00:01:45.999
You're going to have more savings,

00:01:45.999 --> 00:01:47.994
there's more stuff to lend around

00:01:47.994 --> 00:01:51.464
and so the price that's
asked for lending that money

00:01:51.464 --> 00:01:53.923
will go down and that price
is real interest rates.

00:01:53.923 --> 00:01:55.331
These are two ways of viewing it.

00:01:55.331 --> 00:01:57.736
This is the savings driven way

00:01:57.736 --> 00:01:59.938
and this is the real interest rates

00:01:59.938 --> 00:02:01.194
driving investment.

00:02:01.194 --> 00:02:03.267
So that's why it's called the IS curve,

00:02:03.267 --> 00:02:06.405
investment savings curve.

00:02:06.405 --> 00:02:11.078
Now, what I want to talk
about is the LM curve, LM.

00:02:11.078 --> 00:02:12.577
Let me draw a little line over here

00:02:12.577 --> 00:02:14.077
although I'm going to
plot it on top of this

00:02:14.077 --> 00:02:16.796
so that we can start thinking
about the equilibrium level

00:02:16.796 --> 00:02:19.822
of real interest rate and real GDP.

00:02:19.822 --> 00:02:24.538
The LM curve, LM stands
for liquidity preference

00:02:24.538 --> 00:02:25.654
money supply.

00:02:25.654 --> 00:02:41.092
Liquidity preference money supply.

00:02:41.092 --> 00:02:42.933
Liquidity preference, it
sounds like a fancy thing

00:02:42.933 --> 00:02:44.400
but it's actually a very basic,

00:02:44.400 --> 00:02:46.197
it's a very basic idea.

00:02:46.197 --> 00:02:50.203
This is, if we hold real money constant

00:02:50.203 --> 00:02:51.570
and when I talk about real money.

00:02:51.570 --> 00:02:52.933
Let me clarify here.

00:02:52.933 --> 00:02:54.736
If I talk about real money,

00:02:54.736 --> 00:02:58.599
we're talking about the
amount of money in supply

00:02:58.599 --> 00:03:01.484
if we adjust for something like inflation.

00:03:01.484 --> 00:03:02.930
You could measure real money,

00:03:02.930 --> 00:03:06.070
in the U.S. you could
measure it as base money

00:03:06.070 --> 00:03:08.313
or maybe the total amount
of federal reserve notes

00:03:08.313 --> 00:03:09.668
or M0.

00:03:09.668 --> 00:03:14.730
You could measure it as
M0 divided by the CPI.

00:03:14.730 --> 00:03:16.152
Maybe M0 goes up

00:03:16.152 --> 00:03:18.487
but if the CPI goes up by the same amount,

00:03:18.487 --> 00:03:20.073
by the same percentage

00:03:20.073 --> 00:03:23.334
then you're not going to
have a change in real money.

00:03:23.334 --> 00:03:26.150
If M0 goes up without prices increasing

00:03:26.150 --> 00:03:28.203
then real money has gone up.

00:03:28.203 --> 00:03:31.464
If M0 stays constant but
prices have increased

00:03:31.464 --> 00:03:33.563
then real money has gone down.

00:03:33.563 --> 00:03:37.267
All liquidity preference is describing is

00:03:37.267 --> 00:03:38.682
if we assume this is constant

00:03:38.682 --> 00:03:40.331
at any given level here,

00:03:40.331 --> 00:03:45.937
assume constant,

00:03:45.937 --> 00:03:48.465
then the more economic
activity that there is

00:03:48.465 --> 00:03:52.156
the more demand that
there is for that money

00:03:52.156 --> 00:03:55.151
and so there will be
higher real interest rates.

00:03:55.151 --> 00:03:59.073
People will be willing to pay
higher prices for that money

00:03:59.073 --> 00:04:00.482
in real terms.

00:04:00.482 --> 00:04:02.664
All it's saying is if you have very,

00:04:02.664 --> 00:04:03.733
let's start over here,

00:04:03.733 --> 00:04:05.270
if you have a lot of economic activity

00:04:05.270 --> 00:04:07.664
people will want to hold currency

00:04:07.664 --> 00:04:09.404
so that they can have transactions

00:04:09.404 --> 00:04:10.924
so they have some flexibility.

00:04:10.924 --> 00:04:15.197
The money itself is going to
be circulating much, much more.

00:04:15.197 --> 00:04:17.002
There's going to be higher
demand for that money.

00:04:17.002 --> 00:04:18.739
If there's higher demand for that money

00:04:18.739 --> 00:04:22.068
people will either be willing to pay more

00:04:22.068 --> 00:04:23.290
for access to that money

00:04:23.290 --> 00:04:25.234
or you're going to have to pay them more

00:04:25.234 --> 00:04:26.601
for them to give you their money

00:04:26.601 --> 00:04:28.335
because they really want that liquidity.

00:04:28.335 --> 00:04:30.601
They really want that
access to their money.

00:04:30.601 --> 00:04:33.406
And the price of money is interest rates.

00:04:33.406 --> 00:04:38.244
For the LM curve, when we think
about liquidity preference,

00:04:38.244 --> 00:04:41.529
holding real money constant,
high levels of GDP,

00:04:41.529 --> 00:04:42.934
a lot of economic activity,

00:04:42.934 --> 00:04:45.076
people want to have currency,

00:04:45.076 --> 00:04:46.566
demand for currency is high

00:04:46.566 --> 00:04:47.903
so the price is currency is high

00:04:47.903 --> 00:04:48.997
which is real interest rates

00:04:48.997 --> 00:04:52.131
and so we would have
real interest rates high

00:04:52.131 --> 00:04:55.064
due to liquidity preference.

00:04:55.064 --> 00:04:56.411
On the other side of that,

00:04:56.411 --> 00:05:00.263
if you have low economic
activity people might say,

00:05:00.263 --> 00:05:02.603
"Well, there's not as
much demand for currency,

00:05:02.603 --> 00:05:04.904
"there's fewer transactions going on."

00:05:04.904 --> 00:05:07.485
And so you will have to pay someone less

00:05:07.485 --> 00:05:08.570
to part with their money

00:05:08.570 --> 00:05:10.480
or if someone's willing to pay less

00:05:10.480 --> 00:05:11.998
in order to get access to money.

00:05:11.998 --> 00:05:15.738
So at low levels of GDP,
according to liquidity preference,

00:05:15.738 --> 00:05:18.331
you're going to have
lower real interest rates.

00:05:18.331 --> 00:05:23.068
Our LM curve looks something like this,

00:05:23.068 --> 00:05:25.600
this is IS in this dotted line yellow

00:05:25.600 --> 00:05:29.871
and our LM curve looks
something like that.

00:05:29.871 --> 00:05:32.664
When you plot these two
constraints against each other

00:05:32.664 --> 00:05:34.818
the IS is telling us a relationship

00:05:34.818 --> 00:05:37.814
between real interest
rates driving investment

00:05:37.814 --> 00:05:39.000
and how that affects GDP

00:05:39.000 --> 00:05:41.263
or how real GDP affects savings

00:05:41.263 --> 00:05:42.601
affecting real interest rates.

00:05:42.601 --> 00:05:43.936
It's a different constraint

00:05:43.936 --> 00:05:45.938
that what liquidity
preference is telling us.

00:05:45.938 --> 00:05:48.931
This is how much people as
things get better and better,

00:05:48.931 --> 00:05:50.669
more and more economic activity,

00:05:50.669 --> 00:05:52.599
people want to hold more money.

00:05:52.599 --> 00:05:54.001
These two different constraints,

00:05:54.001 --> 00:05:55.862
now you take them both into consideration,

00:05:55.862 --> 00:05:57.999
you end up with an equilibrium point.

00:05:57.999 --> 00:06:01.074
There is going to be 1 point
that meets both constraints

00:06:01.074 --> 00:06:04.267
and this is the point at which
the economy is at equilibrium

00:06:04.267 --> 00:06:13.584
Real interest rates and real GDP.

00:06:13.584 --> 00:06:15.219
Now, let's think about what would happen

00:06:15.219 --> 00:06:18.061
if the federal reserve decided to print,

00:06:18.061 --> 00:06:19.626
if we'd take a U.S. focus,

00:06:19.626 --> 00:06:23.799
if the Central Bank or the federal reserve

00:06:23.799 --> 00:06:29.485
decides to print more money?

00:06:29.485 --> 00:06:32.945
By this definition up
here of our real money

00:06:32.945 --> 00:06:34.441
in the very short term,

00:06:34.441 --> 00:06:36.710
especially when we put
our Keynesian hat on,

00:06:36.710 --> 00:06:39.023
we assume in the very short
term prices are sticky.

00:06:39.023 --> 00:06:41.933
This, in the very short term,
this doesn't change much.

00:06:41.933 --> 00:06:44.602
If this goes up then real money goes up

00:06:44.602 --> 00:06:46.864
especially in the short term.

00:06:46.864 --> 00:06:50.201
Real money goes up.

00:06:50.201 --> 00:06:52.727
If real money goes up,
you're essentially increasing

00:06:52.727 --> 00:06:54.467
the supply of real money.

00:06:54.467 --> 00:06:56.347
Anytime you increase
the supply of real money

00:06:56.347 --> 00:06:59.532
at any given level of demand,

00:06:59.532 --> 00:07:01.520
people are going to
want to pay less for it.

00:07:01.520 --> 00:07:03.801
So what you're going to have happening is,

00:07:03.801 --> 00:07:05.429
so at any given level of GDP

00:07:05.429 --> 00:07:06.864
there's now more money there.

00:07:06.864 --> 00:07:09.198
The price of that money
is going to be less,

00:07:09.198 --> 00:07:10.595
the prices of real interest rate.

00:07:10.595 --> 00:07:14.185
If the federal reserve, if
the central bank prints money

00:07:14.185 --> 00:07:15.936
and real money increases,

00:07:15.936 --> 00:07:17.591
we're assuming in the very short term

00:07:17.591 --> 00:07:19.466
that prices don't change
because they're sticky

00:07:19.466 --> 00:07:20.862
so real money has gone up,

00:07:20.862 --> 00:07:23.658
the price of that real money will go down

00:07:23.658 --> 00:07:25.720
at any given level of GDP.

00:07:25.720 --> 00:07:31.386
That would shift the LM curve down

00:07:31.386 --> 00:07:33.396
and so we can start to
see what would that do

00:07:33.396 --> 00:07:36.548
to our equilibrium interest
rates and level of GDP.

00:07:36.548 --> 00:07:39.470
In that situation, real interest rates,

00:07:39.470 --> 00:07:41.997
the equilibrium real interest
rates clearly went down.

00:07:41.997 --> 00:07:44.186
We also see, based on this model,

00:07:44.186 --> 00:07:48.186
some expansion of GDP.


The one-time pad

WEBVTT
Kind: captions
Language: en

00:00:04.710 --> 00:00:07.650
For over 400 years,
the problem remained.

00:00:07.650 --> 00:00:11.760
How could Alice design a cipher
that hides her fingerprint,

00:00:11.760 --> 00:00:14.580
thus stopping the
leak of information?

00:00:14.580 --> 00:00:18.150
The answer is randomness.

00:00:18.150 --> 00:00:20.890
Imagine Alice rolled
a 26 sided die

00:00:20.890 --> 00:00:23.360
to generate a long
list of random shifts,

00:00:23.360 --> 00:00:26.810
and shared this with Bob
instead of a code word.

00:00:26.810 --> 00:00:28.860
Now, to encrypt
her message, Alice

00:00:28.860 --> 00:00:31.970
uses the list of
random shifts instead.

00:00:31.970 --> 00:00:34.010
It is important that
this list of shifts

00:00:34.010 --> 00:00:38.440
be as long as the message,
as to avoid any repetition.

00:00:38.440 --> 00:00:41.250
Then she sends it to Bob, who
decrypts the message using

00:00:41.250 --> 00:00:44.085
the same list of random
shifts she had given him.

00:00:46.870 --> 00:00:49.460
Now Eve will have a problem,
because the resulting

00:00:49.460 --> 00:00:53.210
encrypted message will have
two powerful properties.

00:00:53.210 --> 00:00:56.765
One, the shifts never fall
into a repetitive pattern.

00:00:59.350 --> 00:01:02.860
And two, the encrypted message
will have a uniform frequency

00:01:02.860 --> 00:01:04.230
distribution.

00:01:04.230 --> 00:01:07.050
Because there is no frequency
differential and therefore

00:01:07.050 --> 00:01:09.736
no leak, it is now
impossible for Eve

00:01:09.736 --> 00:01:10.735
to break the encryption.

00:01:14.090 --> 00:01:18.080
This is the strongest
possible method of encryption,

00:01:18.080 --> 00:01:21.520
and it emerged towards the
end of the 19th century.

00:01:21.520 --> 00:01:25.860
It is now known as
the one-time pad.

00:01:25.860 --> 00:01:28.990
In order to visualize the
strength of the one-time pad,

00:01:28.990 --> 00:01:32.320
we must understand the
combinatorial explosion

00:01:32.320 --> 00:01:34.600
which takes place.

00:01:34.600 --> 00:01:37.600
For example, the Caesar
Cipher shifted every letter

00:01:37.600 --> 00:01:42.970
by the same shift, which was
some number between 1 and 26.

00:01:42.970 --> 00:01:44.970
So if Alice was to
encrypt her name,

00:01:44.970 --> 00:01:48.770
it would result in one of
26 possible encryptions.

00:01:48.770 --> 00:01:52.290
A small number of possibilities,
easy to check them all,

00:01:52.290 --> 00:01:55.280
known as brute force search.

00:01:55.280 --> 00:01:58.060
Compare this to the one-time
pad, where each letter would

00:01:58.060 --> 00:02:01.690
be shifted by a different
number between 1 and 26.

00:02:01.690 --> 00:02:04.000
Now think about the number
of possible encryptions.

00:02:04.000 --> 00:02:08.050
It's going to be 26 multiplied
by itself five times, which

00:02:08.050 --> 00:02:10.360
is almost 12 million.

00:02:10.360 --> 00:02:13.030
Sometimes it's
hard to visualize,

00:02:13.030 --> 00:02:15.850
so imagine she wrote her
name on a single page,

00:02:15.850 --> 00:02:20.900
and on top of it stacked
every possible encryption.

00:02:20.900 --> 00:02:24.520
How high do you
think this would be?

00:02:24.520 --> 00:02:28.750
With almost 12 million
possible five-letter sequences,

00:02:28.750 --> 00:02:32.110
this stack of paper
would be enormous,

00:02:32.110 --> 00:02:35.130
over one kilometer high.

00:02:35.130 --> 00:02:38.240
When Alice encrypts her
name using the one-time pad,

00:02:38.240 --> 00:02:42.240
it is the same as picking
one of these pages at random.

00:02:42.240 --> 00:02:44.720
From the perspective of
Eve, the code breaker,

00:02:44.720 --> 00:02:46.910
every five letter
encrypted word she

00:02:46.910 --> 00:02:51.600
has is equally likely to
be any word in this stack.

00:02:51.600 --> 00:02:55.240
So this is perfect
secrecy in action.


Polyalphabetic cipher

WEBVTT
Kind: captions
Language: en

00:00:04.840 --> 00:00:08.980
A strong cipher is one which
disguises your fingerprint.

00:00:08.980 --> 00:00:11.814
To make a lighter
fingerprint is to flatten

00:00:11.814 --> 00:00:13.480
this distribution of
letter frequencies.

00:00:17.410 --> 00:00:19.480
By the mid-15th
century, we had advanced

00:00:19.480 --> 00:00:23.320
to polyalphabetic ciphers
to accomplish this.

00:00:23.320 --> 00:00:27.970
Imagine Alice and Bob
shared a secret shift word.

00:00:27.970 --> 00:00:30.690
First, Alice converts
the word into numbers

00:00:30.690 --> 00:00:33.140
according to the letter
position in the alphabet.

00:00:33.140 --> 00:00:36.750
Next, this sequence of numbers
is repeated along the message.

00:00:39.340 --> 00:00:41.050
Then each letter
in the message is

00:00:41.050 --> 00:00:45.140
encrypted by shifting according
to the number below it.

00:00:45.140 --> 00:00:48.770
Now she is using multiple
shifts instead of a single shift

00:00:48.770 --> 00:00:50.930
across the message, as
Caesar had done before.

00:00:53.660 --> 00:00:58.380
Then the encrypted message
is sent openly to Bob.

00:00:58.380 --> 00:01:01.480
Bob decrypts the message
by subtracting the shifts

00:01:01.480 --> 00:01:05.800
according to the secret
word he also has a copy of.

00:01:05.800 --> 00:01:09.900
Now imagine a code breaker, Eve,
intercepts a series of messages

00:01:09.900 --> 00:01:13.500
and calculates the
letter frequencies.

00:01:13.500 --> 00:01:17.230
She will find a flatter
distribution, or a lighter

00:01:17.230 --> 00:01:18.480
fingerprint.

00:01:18.480 --> 00:01:22.470
So how could she break this?

00:01:22.470 --> 00:01:26.010
Remember, code breakers
look for information leak,

00:01:26.010 --> 00:01:29.360
the same as finding a
partial fingerprint.

00:01:29.360 --> 00:01:32.210
Any time there is a differential
in letter frequencies,

00:01:32.210 --> 00:01:33.490
a leak of information occurs.

00:01:36.050 --> 00:01:38.059
This difference is
caused by repetition

00:01:38.059 --> 00:01:39.100
in the encrypted message.

00:01:41.660 --> 00:01:46.910
In this case, Alice's cipher
contains a repeating code word.

00:01:46.910 --> 00:01:49.900
To break the encryption,
Even would first

00:01:49.900 --> 00:01:52.330
need to determine the
length of this shift

00:01:52.330 --> 00:01:55.525
word used, not the word itself.

00:01:55.525 --> 00:01:57.650
She will need to go through
and check the frequency

00:01:57.650 --> 00:02:00.540
distribution of
different intervals.

00:02:00.540 --> 00:02:02.400
When she checks the
frequency distribution

00:02:02.400 --> 00:02:07.350
of every fifth letter, the
fingerprint will reveal itself.

00:02:07.350 --> 00:02:09.990
The problem now is to
break five Cesar Ciphers

00:02:09.990 --> 00:02:12.620
in a repeating sequence.

00:02:12.620 --> 00:02:16.750
Individually this is a trivial
task, as we have seen before.

00:02:16.750 --> 00:02:18.520
The added strength
of this cipher

00:02:18.520 --> 00:02:21.320
is the time taken to determine
the length of the shift

00:02:21.320 --> 00:02:22.790
word used.

00:02:22.790 --> 00:02:26.342
The longer the shift word,
the stronger the cipher.


Loanable funds interpretation of IS curve

WEBVTT
Kind: captions
Language: en

00:00:00.500 --> 00:00:04.420
In the last video, we began to
explore the IS curve, which,

00:00:04.420 --> 00:00:07.970
as I think I mentioned,
stands for investment savings.

00:00:07.970 --> 00:00:10.210
And we really analyzed
it from the point

00:00:10.210 --> 00:00:12.850
of view of investment.

00:00:12.850 --> 00:00:15.420
We thought of it as
real interest rates

00:00:15.420 --> 00:00:19.110
driving the level of investment,
which drives the equilibrium

00:00:19.110 --> 00:00:20.750
level of real output.

00:00:20.750 --> 00:00:22.910
High real interest
rates, low level

00:00:22.910 --> 00:00:24.940
of investment, low
level of investment

00:00:24.940 --> 00:00:26.870
leads to low equilibrium output.

00:00:26.870 --> 00:00:29.670
So this scenario is closer
to that right over there.

00:00:29.670 --> 00:00:31.850
If real interest
rates are lower,

00:00:31.850 --> 00:00:35.450
then that leads to higher levels
of planned investment, which

00:00:35.450 --> 00:00:39.050
leads to a higher level
of equilibrium output.

00:00:39.050 --> 00:00:41.640
So that right over there.

00:00:41.640 --> 00:00:43.914
So that was more from the
investment point of view.

00:00:43.914 --> 00:00:45.330
What I want to do
in this video is

00:00:45.330 --> 00:00:47.230
explore the exact
same relationship,

00:00:47.230 --> 00:00:49.180
the exact same curve,
but think of it

00:00:49.180 --> 00:00:51.124
more from the savings
point of view.

00:00:51.124 --> 00:00:52.540
And in this
situation, we're going

00:00:52.540 --> 00:00:54.290
to have this exact
same thing, but instead

00:00:54.290 --> 00:00:57.550
of viewing real interest
rates as driving GDP,

00:00:57.550 --> 00:01:01.890
we're actually going to view GDP
as driving real interest rate.

00:01:01.890 --> 00:01:04.110
So let me leave this up here.

00:01:04.110 --> 00:01:08.270
But let's just break down
the expenditure model of GDP.

00:01:08.270 --> 00:01:11.269
So we know that aggregate
income, or aggregate GDP,

00:01:11.269 --> 00:01:13.560
or aggregate output-- however
you want to think of it--

00:01:13.560 --> 00:01:15.660
is equal to, and you
could break it up

00:01:15.660 --> 00:01:17.840
into its component
expenditures, it's

00:01:17.840 --> 00:01:21.030
equal to aggregate
consumer spending, which

00:01:21.030 --> 00:01:23.600
is a function of
disposable income.

00:01:23.600 --> 00:01:27.820
y minus t is disposable income,
aggregate income minus taxes,

00:01:27.820 --> 00:01:32.845
plus investment plus
government expenditures.

00:01:35.295 --> 00:01:36.420
And I could do net exports.

00:01:36.420 --> 00:01:38.490
But for simplicity
for this discussion

00:01:38.490 --> 00:01:40.670
we'll just assume we
are in a closed economy.

00:01:40.670 --> 00:01:42.210
It makes good
conceptualizing saving

00:01:42.210 --> 00:01:44.350
and investment a
little bit easier.

00:01:44.350 --> 00:01:47.820
Now what I want to do
is solve for investment.

00:01:47.820 --> 00:01:49.400
So if I solve for
investment I'm just

00:01:49.400 --> 00:01:52.470
going to subtract this
piece and this piece

00:01:52.470 --> 00:01:54.310
from both sides
of this equation.

00:01:54.310 --> 00:02:00.890
And I get aggregate income
minus total aggregate consumer

00:02:00.890 --> 00:02:06.764
spending minus total
government spending

00:02:06.764 --> 00:02:08.639
is equal to-- on the
right hand side I'm just

00:02:08.639 --> 00:02:14.350
going to be left with, with
investment right over here.

00:02:14.350 --> 00:02:17.250
And this thing right
over here is interesting

00:02:17.250 --> 00:02:21.320
because this is total
income minus what--

00:02:21.320 --> 00:02:23.750
and let me make sure that we,
I don't want to confuse you.

00:02:23.750 --> 00:02:25.060
Because that looks
like a lowercase c.

00:02:25.060 --> 00:02:26.550
And if we're talking about
aggregate consumption

00:02:26.550 --> 00:02:28.170
it's usually an uppercase C.

00:02:28.170 --> 00:02:31.710
So on the left hand side, we
have total aggregate income

00:02:31.710 --> 00:02:35.390
minus consumer spending
minus government spending.

00:02:35.390 --> 00:02:38.480
So you could really view this
as, this right over here,

00:02:38.480 --> 00:02:41.230
really is aggregate savings.

00:02:41.230 --> 00:02:43.880
This over here
really is savings.

00:02:43.880 --> 00:02:46.050
And as we see when on
one side of the economy,

00:02:46.050 --> 00:02:48.580
when people are saving, that
goes into banks and it gets

00:02:48.580 --> 00:02:50.900
lent out.

00:02:50.900 --> 00:02:52.200
And then it gets reinvested.

00:02:52.200 --> 00:02:55.150
Or you could save
directly by reinvesting.

00:02:55.150 --> 00:02:57.716
And so what we have here is
savings is equal to investment.

00:02:57.716 --> 00:02:59.340
And that's why it's
called an IS curve,

00:02:59.340 --> 00:03:01.380
because when you look at
the expenditure model,

00:03:01.380 --> 00:03:04.086
savings and investment
are really the same thing.

00:03:04.086 --> 00:03:05.460
They're really
just saying, look,

00:03:05.460 --> 00:03:06.960
there's two ways
to view this curve.

00:03:06.960 --> 00:03:11.080
It's investment driven
or its savings driven.

00:03:11.080 --> 00:03:12.480
And when you think
of it this way

00:03:12.480 --> 00:03:15.445
you have a slightly
different view of this curve.

00:03:15.445 --> 00:03:17.320
Because when you view
it from a savings point

00:03:17.320 --> 00:03:20.320
you say, well, what's going
to happen if GDP goes up?

00:03:20.320 --> 00:03:24.320
What happens if we have
a high GDP over here?

00:03:24.320 --> 00:03:27.090
So if we have a
high GDP, or let's

00:03:27.090 --> 00:03:31.000
say in particular
if GDP goes up,

00:03:31.000 --> 00:03:33.140
the consumer spending,
which is a function of GDP,

00:03:33.140 --> 00:03:33.970
it will go up.

00:03:33.970 --> 00:03:35.950
But it won't go up as much.

00:03:35.950 --> 00:03:39.030
It's going to go up by
this expression right

00:03:39.030 --> 00:03:41.350
here times, if we
assume a linear model,

00:03:41.350 --> 00:03:44.390
times the marginal propensity to
consume, which is less than 1,

00:03:44.390 --> 00:03:45.920
it's between 0 and 1.

00:03:45.920 --> 00:03:48.347
So this is going to
go up less than that.

00:03:48.347 --> 00:03:50.180
And then we can, for
the sake of this model,

00:03:50.180 --> 00:03:52.120
we'll assume right
now that happens

00:03:52.120 --> 00:03:54.670
without any change in
government expenditure.

00:03:54.670 --> 00:03:59.260
So if total aggregate
income goes up

00:03:59.260 --> 00:04:01.430
then savings are going
to go up, if we assume

00:04:01.430 --> 00:04:03.620
government expenditures
holds constant.

00:04:03.620 --> 00:04:09.530
So then we have savings goes up.

00:04:09.530 --> 00:04:11.630
And if savings
goes up, that means

00:04:11.630 --> 00:04:13.310
we have more loanable funds.

00:04:13.310 --> 00:04:15.040
There's more money to lend.

00:04:15.040 --> 00:04:16.550
And if there's
more money to lend,

00:04:16.550 --> 00:04:18.350
what's going to happen
to interest rates?

00:04:18.350 --> 00:04:20.190
Well interest rates
are just the price

00:04:20.190 --> 00:04:22.547
of borrowing money,
the price of money.

00:04:22.547 --> 00:04:24.880
So if you have more of something
the price of that thing

00:04:24.880 --> 00:04:26.240
goes down.

00:04:26.240 --> 00:04:31.587
So if savings goes up then
real interest rates go down.

00:04:31.587 --> 00:04:33.170
So if you have a
high GDP you're going

00:04:33.170 --> 00:04:35.220
to end up with low
real interest rates.

00:04:35.220 --> 00:04:37.690
So once again, is looking at
it from a point of view of GDP

00:04:37.690 --> 00:04:39.250
driving interest rates.

00:04:39.250 --> 00:04:40.400
We have high savings here.

00:04:40.400 --> 00:04:42.150
So we're going to have
low interest rates.

00:04:42.150 --> 00:04:43.980
And you view it the
other way around.

00:04:43.980 --> 00:04:48.260
If you have a lower
income this thing

00:04:48.260 --> 00:04:50.440
is going to also decrease.

00:04:50.440 --> 00:04:52.900
But is not going to decrease
as much as this did,

00:04:52.900 --> 00:04:54.620
because of the
marginal propensity

00:04:54.620 --> 00:04:58.280
to consume is less than
1, we saw that up here.

00:04:58.280 --> 00:05:01.600
We saw that all the way
over here, right over there.

00:05:01.600 --> 00:05:04.140
And so in aggregate, the
savings are going to go down.

00:05:04.140 --> 00:05:06.850
Once again, we hold
government spending constant.

00:05:06.850 --> 00:05:11.250
So in this situation,
savings are going to go down.

00:05:11.250 --> 00:05:13.120
And if you have
fewer loanable funds,

00:05:13.120 --> 00:05:15.180
there's less
savings to lend out.

00:05:15.180 --> 00:05:18.271
Then if you have less of
a supply of something,

00:05:18.271 --> 00:05:19.770
what's going to
happen to its price?

00:05:19.770 --> 00:05:21.060
It's price is going to go up.

00:05:21.060 --> 00:05:23.970
The price of borrowing
money is the interest rate.

00:05:23.970 --> 00:05:27.360
So in this situation
interest rates would go up.

00:05:27.360 --> 00:05:30.040
So that's going in this
direction, right over here.

00:05:30.040 --> 00:05:33.740
If aggregate income goes
down, loanable funds go down,

00:05:33.740 --> 00:05:37.020
interest rates are
going to be higher.

00:05:37.020 --> 00:05:40.120
So once again, the same
exact curve, IS curve.

00:05:40.120 --> 00:05:41.900
But there's two takeaways here.

00:05:41.900 --> 00:05:43.616
One is to realize
why it's called IS,

00:05:43.616 --> 00:05:45.490
that investment and
savings, when you view it

00:05:45.490 --> 00:05:47.710
from this point of view,
really are the same thing.

00:05:47.710 --> 00:05:51.607
One person's savings can be
another person's investment.

00:05:51.607 --> 00:05:53.940
And when we viewed it from
the investment point of view,

00:05:53.940 --> 00:05:56.565
we were viewing r as driving y.

00:05:56.565 --> 00:05:58.440
Now we're looking at it
the other way around.

00:05:58.440 --> 00:06:01.870
y is driving savings,
which is driving r.

00:06:01.870 --> 00:06:06.072
But it gives us the exact same
relationship for this model.


Connecting the keynesian cross to the IS curve

WEBVTT
Kind: captions
Language: en

00:00:00.566 --> 00:00:02.900
In the last video we
hopefully got the intuition

00:00:02.900 --> 00:00:05.816
between how real interest rates

00:00:05.816 --> 00:00:08.002
might impact planned investment.

00:00:08.002 --> 00:00:11.233
We saw that if real
interest rates went up,

00:00:11.233 --> 00:00:15.484
then planned investment went down.

00:00:15.484 --> 00:00:17.204
If real interest rates went down,

00:00:17.204 --> 00:00:21.149
then planned investment went up.

00:00:21.149 --> 00:00:22.937
What we want to do in this video is

00:00:22.937 --> 00:00:25.067
take this conclusion right over here,

00:00:25.067 --> 00:00:28.150
this hopefully fairly intuitive
conclusion right over here

00:00:28.150 --> 00:00:30.150
and apply it to our Keynesian Cross

00:00:30.150 --> 00:00:31.734
and think about how real interest rates

00:00:31.734 --> 00:00:34.270
would effect overall planned expenditure

00:00:34.270 --> 00:00:35.783
and what that would do in a model

00:00:35.783 --> 00:00:37.982
like the Keynesian Cross,

00:00:37.982 --> 00:00:42.934
what that would do to our
equilibrium real GDPs.

00:00:42.934 --> 00:00:44.600
Just as a reminder,

00:00:44.600 --> 00:00:46.849
let's just draw our Keynesian Cross first,

00:00:46.849 --> 00:00:48.433
or parts of it.

00:00:48.433 --> 00:00:49.933
On this axis right over here,

00:00:49.933 --> 00:00:52.116
we have expenditures.

00:00:52.116 --> 00:00:55.267
This axis right over here,

00:00:55.267 --> 00:00:57.383
we have income.

00:00:57.383 --> 00:00:59.515
We know, from many videos now,

00:00:59.515 --> 00:01:01.515
that an economy is a equilibrium

00:01:01.515 --> 00:01:03.185
when income is equal,

00:01:03.185 --> 00:01:05.648
when aggregate real income

00:01:05.648 --> 00:01:07.868
is equal to aggregate real expenditures.

00:01:07.868 --> 00:01:10.357
Circular flow of GDP.

00:01:10.357 --> 00:01:11.273
Let's draw …

00:01:11.273 --> 00:01:13.450
Let me make a line that's all the points

00:01:13.450 --> 00:01:16.608
where Y is equal to expenditures.

00:01:16.608 --> 00:01:19.785
Along this 45 degree line right over here.

00:01:19.785 --> 00:01:21.358
This is our expenditures.

00:01:21.358 --> 00:01:22.608
At this point right over here,

00:01:22.608 --> 00:01:24.318
that should be the same value

00:01:24.318 --> 00:01:27.023
as what our aggregate income is.

00:01:27.023 --> 00:01:28.524
That's part of the Keynesian Cross.

00:01:28.524 --> 00:01:29.783
The other part is to actually

00:01:29.783 --> 00:01:32.607
plot planned expenditures relative to this

00:01:32.607 --> 00:01:33.941
and then see where they intersect.

00:01:33.941 --> 00:01:37.049
What the equilibrium for that
planned expenditure line?

00:01:37.049 --> 00:01:38.848
I'll write it here as ...

00:01:38.848 --> 00:01:41.049
I've written it in the past as planned.

00:01:41.049 --> 00:01:42.384
I just wrote out the word.

00:01:42.384 --> 00:01:45.651
Planned expenditures.

00:01:45.651 --> 00:01:51.858
We could write it as
expenditures planned, like that.

00:01:51.858 --> 00:01:55.784
It's equal to our aggregate consumption.

00:01:55.784 --> 00:01:57.117
Our aggregate consumption,

00:01:57.117 --> 00:02:01.116
we can write it as a function
of disposable income.

00:02:01.116 --> 00:02:02.983
Y - T is disposable income.

00:02:02.983 --> 00:02:05.583
Aggregat income minus aggregate taxes.

00:02:05.583 --> 00:02:07.117
I want to be very clear here.

00:02:07.117 --> 00:02:09.522
This is not saying C x Y - T.

00:02:09.522 --> 00:02:11.856
This is saying C is a function of Y - T.

00:02:11.856 --> 00:02:15.116
Give my a Y - T and I will give you a C.

00:02:15.116 --> 00:02:17.439
For the sake of our
Keynesian Cross analysis,

00:02:17.439 --> 00:02:18.715
and this is kind of kind
of what you would see

00:02:18.715 --> 00:02:20.359
in a traditional intro class,

00:02:20.359 --> 00:02:23.651
we assume that we have a
linear consumption function.

00:02:23.651 --> 00:02:25.716
We assume that our consumption functions.

00:02:25.716 --> 00:02:28.649
C as a function of disposable income.

00:02:28.649 --> 00:02:31.783
It might be something like
our autonomous consumption

00:02:31.783 --> 00:02:33.939
plus our marginal propensity to consume

00:02:33.939 --> 00:02:37.783
times our aggregate income, minus taxes.

00:02:37.783 --> 00:02:39.916
This right over here
really is multiplication.

00:02:39.916 --> 00:02:42.250
We could distribute this C 1.

00:02:42.250 --> 00:02:46.985
This is just saying C
as a function of Y - T.

00:02:46.985 --> 00:02:49.856
That's only one part of
planned expenditures.

00:02:49.856 --> 00:02:51.049
Above and beyond that,

00:02:51.049 --> 00:02:53.690
we have planned investment.

00:02:53.690 --> 00:02:55.607
We're talking about the
planned side of things.

00:02:55.607 --> 00:02:57.382
Now we know that planned investment ...

00:02:57.382 --> 00:03:00.450
In the past we viewed it as a constant,

00:03:00.450 --> 00:03:01.859
but now we know it can actually be

00:03:01.859 --> 00:03:05.381
a function of real interest rates.

00:03:05.381 --> 00:03:06.941
Above and beyond that,

00:03:06.941 --> 00:03:09.450
we have government expenditures

00:03:09.450 --> 00:03:11.522
and then net exports.

00:03:11.522 --> 00:03:14.117
For some given real interest rate,

00:03:14.117 --> 00:03:15.584
we can plot this line.

00:03:15.584 --> 00:03:17.190
The consumption function right over here

00:03:17.190 --> 00:03:20.984
is just a line with a
positive slope that intersects

00:03:20.984 --> 00:03:24.857
the vertical axis at some place up here.

00:03:24.857 --> 00:03:26.383
It has a positive intersect.

00:03:26.383 --> 00:03:28.316
All of these, for given interest rate,

00:03:28.316 --> 00:03:29.941
these are all going to be constant.

00:03:29.941 --> 00:03:34.050
Our planned expenditures would
look something like this.

00:03:34.050 --> 00:03:37.318
It might look something like that.

00:03:37.318 --> 00:03:40.608
This is YP.

00:03:40.608 --> 00:03:43.182
Let's call this YP_1.

00:03:43.182 --> 00:03:46.247
This is the YP we get when we pick …

00:03:46.247 --> 00:03:47.450
I'll just write ...

00:03:47.450 --> 00:03:49.190
I'll just rewrite the
whole thing over again.

00:03:49.190 --> 00:03:50.916
We have our consumption,

00:03:50.916 --> 00:03:53.716
which is a function of Y - T,

00:03:53.716 --> 00:03:56.858
plus the level of
planned investment at ...

00:03:56.858 --> 00:04:00.048
Let's say interest rate R1,

00:04:00.048 --> 00:04:01.856
so at some given interest rate,

00:04:01.856 --> 00:04:03.857
plus government spending,

00:04:03.857 --> 00:04:07.524
plus net exports.

00:04:07.524 --> 00:04:08.650
We see ...

00:04:08.650 --> 00:04:10.051
We've done this Keynesian Cross analysis

00:04:10.051 --> 00:04:11.916
several times now, already.

00:04:11.916 --> 00:04:14.783
This is our equilibrium level of GDP.

00:04:14.783 --> 00:04:17.251
This is where along our
planned expenditure line,

00:04:17.251 --> 00:04:20.784
where income is equal to expenditures,

00:04:20.784 --> 00:04:22.450
or output is equal to expenditures.

00:04:22.450 --> 00:04:25.191
We are equilibrium right over here.

00:04:25.191 --> 00:04:28.999
We're not eating into
inventories in an unplanned way

00:04:28.999 --> 00:04:31.398
and we're not building excessive inventory

00:04:31.398 --> 00:04:34.597
above and beyond what we had planned.

00:04:34.597 --> 00:04:35.998
Now, what I want to think about,

00:04:35.998 --> 00:04:43.731
what happens if interest
rates go from R1 to R2?

00:04:43.731 --> 00:04:47.315
What happens if interest
rates go from R1 to R2

00:04:47.315 --> 00:04:50.665
and in particular let's assume that R2?

00:04:50.665 --> 00:04:54.796
Now, we're going have
planned investment at R2

00:04:54.796 --> 00:04:58.316
and we're going to assume
that R2 is less than R1.

00:04:58.316 --> 00:04:59.265
We're essentially saying,

00:04:59.265 --> 00:05:01.731
what happens when interest rates go down.

00:05:01.731 --> 00:05:02.597
We already know.

00:05:02.597 --> 00:05:04.856
When interest rates go down,

00:05:04.856 --> 00:05:08.798
planned investment goes up.

00:05:08.798 --> 00:05:09.932
Everything else equal,

00:05:09.932 --> 00:05:11.933
if this thing shifts up,

00:05:11.933 --> 00:05:14.999
if this term right over
here goes from R ...

00:05:14.999 --> 00:05:18.149
if the input into it, if the
real interest rate goes down,

00:05:18.149 --> 00:05:21.332
then this whole expression
is going to go up

00:05:21.332 --> 00:05:23.423
and so you're going to have an increase.

00:05:23.423 --> 00:05:25.080
You're going to have a shifting up

00:05:25.080 --> 00:05:26.465
of your planned expenditure

00:05:26.465 --> 00:05:28.996
for any level of income.

00:05:28.996 --> 00:05:31.198
It might look something like this.

00:05:31.198 --> 00:05:34.079
It would look something like this.

00:05:34.079 --> 00:05:37.196
This delta right over here, this ...

00:05:37.196 --> 00:05:38.665
Let me do it right over here.

00:05:38.665 --> 00:05:40.398
This distance right over here

00:05:40.398 --> 00:05:44.263
is going to be your change
in planned investment.

00:05:44.263 --> 00:05:46.996
It went up because
interest rates went down.

00:05:46.996 --> 00:05:49.329
We saw that in the last video.

00:05:49.329 --> 00:05:51.931
We saw that we got to a new level,

00:05:51.931 --> 00:05:53.369
or we see now that

00:05:53.369 --> 00:05:54.743
when you shift that up,

00:05:54.743 --> 00:05:55.600
that investment goes up.

00:05:55.600 --> 00:05:57.200
Because real interest rate went down,

00:05:57.200 --> 00:05:59.684
you get to a new equilibrium point.

00:05:59.684 --> 00:06:02.768
That equilibrium point
is a higher level ...

00:06:02.768 --> 00:06:06.184
it's a higher level of GDP or income.

00:06:06.184 --> 00:06:08.101
We know from previous videos as well,

00:06:08.101 --> 00:06:10.133
that this distance right over here

00:06:10.133 --> 00:06:12.768
is the same as our multiplier

00:06:12.768 --> 00:06:15.599
times the amount that
things got bumped up.

00:06:15.599 --> 00:06:17.408
The amount that things got bumped up

00:06:17.408 --> 00:06:20.099
was the change in planned investment.

00:06:20.099 --> 00:06:22.532
Then, we multiply that
times our multiplier.

00:06:22.532 --> 00:06:24.684
Our multiplier is 1 over

00:06:24.684 --> 00:06:27.017
the marginal propensity to save,

00:06:27.017 --> 00:06:31.132
or 1 over 1- the marginal
propensity to consume.

00:06:31.132 --> 00:06:33.102
The marginal propensity to consume ...

00:06:33.102 --> 00:06:35.398
We assume it's going to be constant

00:06:35.398 --> 00:06:37.199
in order to even be able to do this map.

00:06:37.199 --> 00:06:39.266
That's this piece right over there.

00:06:39.266 --> 00:06:42.531
That is equal to our C1.

00:06:42.531 --> 00:06:44.266
The main theme here,

00:06:44.266 --> 00:06:48.017
the real big picture
here as we go on our way

00:06:48.017 --> 00:06:50.532
to constructing our ISLM model,

00:06:50.532 --> 00:06:52.266
is really that all we're seeing ...

00:06:52.266 --> 00:06:54.665
when real interest rates go up,

00:06:54.665 --> 00:06:56.278
planned investment goes down.

00:06:56.278 --> 00:06:57.696
When interest rates go down ...

00:06:57.696 --> 00:07:00.126
which is what we saw in this
example right over here.

00:07:00.126 --> 00:07:01.662
Actually, let me write this down.

00:07:01.662 --> 00:07:08.198
Y, planned expenditures 2 at
C as a function of Y - D +.

00:07:08.198 --> 00:07:11.778
Our new planned investment,
at this lower interest rate,

00:07:11.778 --> 00:07:13.817
+ G + net exports.

00:07:13.817 --> 00:07:17.454
This is our Y2 right over
here, our planned expenditures.

00:07:17.454 --> 00:07:18.788
We saw in this example,

00:07:18.788 --> 00:07:20.721
when real interest rates went down,

00:07:20.721 --> 00:07:23.192
planned expenditures ...

00:07:23.192 --> 00:07:24.691
When real interest rates went down,

00:07:24.691 --> 00:07:26.120
planned investment went up.

00:07:26.120 --> 00:07:29.387
That made total planned
expenditures go up.

00:07:29.387 --> 00:07:31.985
That made total GDP go up.

00:07:31.985 --> 00:07:34.054
Now we can have another relationship,

00:07:34.054 --> 00:07:36.190
which is really very analogous to this.

00:07:36.190 --> 00:07:38.941
Really, by changing this,
we're just shifting this curve.

00:07:38.941 --> 00:07:42.587
Then, you have the multiplier
effect on our equilibrium output.

00:07:42.587 --> 00:07:43.720
The big takeaway from here is,

00:07:43.720 --> 00:07:46.024
if real interest rates go up,

00:07:46.024 --> 00:07:49.121
not only does planned investment go down,

00:07:49.121 --> 00:07:51.690
that would shift this entire curve down.

00:07:51.690 --> 00:07:53.525
Then, that would also cause

00:07:53.525 --> 00:07:57.191
our equilibrium real GDP to go down.

00:07:57.191 --> 00:07:59.078
It would go down by some multiplier,

00:07:59.078 --> 00:08:01.501
by the multiplier of
how much this goes down.

00:08:01.501 --> 00:08:03.500
If real interest rates go down,

00:08:03.500 --> 00:08:04.999
then planned investment,

00:08:04.999 --> 00:08:06.388
because of what we saw in the last video,

00:08:06.388 --> 00:08:07.417
goes up.

00:08:07.417 --> 00:08:09.001
Then, that would cause ...

00:08:09.001 --> 00:08:09.986
That would cause this whole ...

00:08:09.986 --> 00:08:11.119
That's what we did in this video.

00:08:11.119 --> 00:08:12.720
This curve would shift up.

00:08:12.720 --> 00:08:13.916
If this curve shifts up,

00:08:13.916 --> 00:08:16.520
our equilibrium GDP is going to be

00:08:16.520 --> 00:08:20.084
however much this shifted,
times the multiplier,

00:08:20.084 --> 00:08:23.916
so your equilibrium GDP is going to go up.

00:08:23.916 --> 00:08:26.627
You really have a very
similar relationship

00:08:26.627 --> 00:08:28.916
in terms of just how things move.

00:08:28.916 --> 00:08:31.083
We can plot this.

00:08:31.083 --> 00:08:33.119
Economist are famous for

00:08:33.119 --> 00:08:35.707
not always plotting the
independent variable

00:08:35.707 --> 00:08:37.499
the way you would want to.

00:08:37.499 --> 00:08:38.787
As we construct our ...

00:08:38.787 --> 00:08:40.217
What we're going to see is our IS curve.

00:08:40.217 --> 00:08:42.467
It stands for investment savings.

00:08:42.467 --> 00:08:43.301
What we're going to do

00:08:43.301 --> 00:08:44.719
and we'll talk more
about that in the future.

00:08:44.719 --> 00:08:46.317
We plot the convention is to put

00:08:46.317 --> 00:08:48.986
real interest rates on the vertical axis

00:08:48.986 --> 00:08:53.217
and to put real GDP right over here.

00:08:53.217 --> 00:08:54.717
If you want to look at this relationship,

00:08:54.717 --> 00:08:56.918
when we have a high real interest rate,

00:08:56.918 --> 00:09:00.253
we're going to have a low real GDP.

00:09:00.253 --> 00:09:02.885
When we have a low real interest rate,

00:09:02.885 --> 00:09:04.253
we're going to have a high GDP.

00:09:04.253 --> 00:09:06.253
It's going to make spending go up.

00:09:06.253 --> 00:09:07.051
If spending goes up,

00:09:07.051 --> 00:09:08.156
you have a multiplier effect.

00:09:08.156 --> 00:09:10.127
It makes our equilibrium output go up.

00:09:10.127 --> 00:09:12.460
Low interest rate, high real GDP,

00:09:12.460 --> 00:09:15.125
so you have a curve that relates.

00:09:15.125 --> 00:09:18.031
If you want to relate real
GDP to real interest rates

00:09:18.031 --> 00:09:19.726
you get a curve like this,

00:09:19.726 --> 00:09:21.697
and it's called the IS curve.

00:09:21.697 --> 00:09:24.526
IS comes for investment savings.

00:09:24.526 --> 00:09:26.531
We're really more focused
on the I part of it,

00:09:26.531 --> 00:09:27.927
the way we analyzed here.

00:09:27.927 --> 00:09:30.364
The whole reason, based
on the logic in this video

00:09:30.364 --> 00:09:31.865
and the last one as well,

00:09:31.865 --> 00:09:33.994
the whole reason why we
have this relationship

00:09:33.994 --> 00:09:37.793
is due to real interest
rates impact on investment.

00:09:37.793 --> 00:09:39.326
When you have high real interest rates,

00:09:39.326 --> 00:09:41.031
you don't have much investment.

00:09:41.031 --> 00:09:45.531
Also, you'll be sapping out of GDP.

00:09:45.531 --> 00:09:47.125
If you lower interest rates,

00:09:47.125 --> 00:09:50.260
then that makes you end up
having a lot more investment,

00:09:50.260 --> 00:09:51.260
like we saw in the last video.

00:09:51.260 --> 00:09:53.793
That will expand GDP by the multiplier

00:09:53.793 --> 00:09:57.000
that we see right over there.