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

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

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

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

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

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

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

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

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