Do Now: 1) What is the general relationship between the flow of water into a bathtub and the amount of water that is in the tub? 2) If the person filling the bathtub has a particular goal of filling the water up to a certain level, what will they do once that level is reach? 3) Relate this to savings and net worth.

How is the savings rate calculated?

If Sue earns $3000 a month and deposits $300 into her bank account every month, in addition to paying off $150 from her credit card balance, while spending the rest on current needs and wants, what is her savings rate?

Net Worth is defined as the sum of ones assets minus ones liabilities. Assets: anything of value that one owns Liabilities: the debts that one owes A balance sheet shows assets and liabilities, along with net worth.

Sue has a home that is currently worth $250,000, with a mortgage for $200,000. She owes $5,000 on one credit card, and $10,000 in student loans. She has $2,000 in savings bonds, a car worth $10,000, a computer worth $1,000, and $1,000 coin collection inherited from her grandparents. She owns no other property of any significant value. Create a Balance sheet for Sue:

Sue’s balance sheet next year Now apply Sue’s savings rate ($3000 a month in income, with $300 deposited in her bank account, and $150 in credit card payments) to her balance sheet. What would Sue’s net worth be 1 year from now if her savings rate remained constant? (for simplicity assume 0% interest on all loans, and no increase in value of any of her assets).

How would Sue’s balance sheet change in one year if in addition to her savings rate, her house also increased in value to $300,000. How do you think this might this influence her willingness to borrow money on luxuries, vacations, and gifts for the holidays ?

What would Sue’s net worth be if her home had decreased in value to $150,000 instead? How would this affect her willingness to borrow money to spend on thins such as vacations, luxuries, and gifts for the holidays?

Capital gains are defined as increases in value of existing assets. Capital Losses are decreases in value of existing assets. What is the relationship between capital gains, capital losses, and savings in determining net worth? (create a simple equation).

How do you think large capital gains would affect savings rates? How would large capital losses affect savings rates?

Do Now: Create a circular flow model which includes the government’s role in the economy How can we relate personal savings to the circular flow model? Which are the other 2 groups represented in the full circular flow model? How can their savings be related to the circular flow model?

What is the equation for the expenditure approach to calculating GDP? Give an example of each component

Presume that we are in a closed economy, with neither exports nor imports National Savings (S) refers to the amount saved in the nation as a whole. Referring to the expenditure approach equation for GDP, how would we derive the level of National Savings… National Savings

Public Savings National Savings can be divided into Public and Private Savings. Public Savings refers to the savings of governments. T is defined as net tax receipts (taxes paid minus transfer payments). Which symbol from the expenditure approach equation measures government spending? How would we then define public savings?

Private Savings Private Savings refers to the savings among both households and businesses. If National Savings must equal the sum of public saving and private savings, how can we represent the equation for Private Savings.

Application Problems: 1) What would be the effect on both public and private saving if the government collected more in taxes while everything else is held constant? How would this affect National Savings? 2) What would be the effect of increased Consumption (C) on all of the above, ceteris paribus? 3) What would be the effect of increased Government spending (G) on all of the above, ceteris paribus?

Washington Post Article According to the article, what is the trend in Personal Savings at the time it was written? Which factors would help explain this trend? (hint: think about the date and the factors that influence personal savings rates) What was the trend in Consumer Spending during this period? How is that consistent with the trend in Personal Savings? (relate it to the equation)

Do Now: Why do businesses invest in new capital?

Scenario: In groups of 4, you will create a small business. Briefly describe your business (try to use something you are familiar with), the product or service that you are selling, and the costs of running your business (be very brief – you may do this in bullet point form). Describe the capital goods that may be used in your business and the way that they increase your efficiency (increased output, lower costs, etc., try to be specific).

Capital Investment How would you rationally evaluate whether or not it is rational to spend money on purchasing any particular piece of capital? If you, as the small business owners, didn’t have the money saved to invest in the new capital, how would you obtain it?

Small Business loans for Investment How would you decide whether or not to take out a loan for new capital investment? How is this decision making process the same as it is for the decision making process for using your own savings to invest in the firm? How is it different?

Real Interest Rates and Investment: How are real interest rates calculated? How would an increase in real interest rates affect your business’s willingness to take out loans for capital investment? How would a decrease in real interest rates affect your business’s willing to take out loans for capital investment?

Graph: Create a graph showing the relationship between the real interest rate and the amount of money that you will invest presuming that all money for investment had to be borrowed from a lender. (the real interest rate will be on the y axis, and the money invested will be on the x asis).

Applications: 1) If your product suddenly become very fashionable, and you were able to sell it at a higher price (without necessarily increasing costs per unit), how would your investment curve shift? 2) If the economy was experiencing a prolonged downturn, and as a result the demand curve for your product shifted to the left, what would happen to your investment curve?