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DIRECT: The mathematical notion that two variables change in the same direction, that is, an increase in X goes with an increase in Y, or a decrease in X goes with a decrease in Y. The alternative to a direct relation is an inverse relation, in which an increase in one variable goes with a decrease in the other. Direct relations are graphically illustrated by positively-sloped curves, a common example being the supply curve.

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Lesson 11: Circular Flow | Unit 2: Financial Markets Page: 10 of 22

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  • The main function of financial markets, which is to divert national income from household consumption to business investment.
  • The difference between the real or physical side of the economy (the production of goods that satisfy wants and needs) and the paper or financial side (legal claims on or ownership of physical resources, goods, and production).
  • How income is diverted from legal-claim buyer to legal-claim seller through the financial markets.
  • Why saving can be thought as a nonconsumption use of income, as making a loan, or as supplying income to the financial markets in exchange for a legal claim.
  • Two basic reasons to save: (1) in return for an interest payment or (2) to accumulate income that can be spent later.
  • Investment, which is business sector expenditures on gross domestic product for capital goods.
  • How the business sector borrows income through financial markets and uses this income flow to finance capital investment.
  • Why adding saving, investment, and financial markets does not change the total volume of the circular flow.
  • That imbalances between saving and investment trigger economic stability, business cycles, unemployment, and inflation.

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FOUR-SECTOR AGGREGATE EXPENDITURES LINE

A graphical depiction of the relation between aggregate expenditures by the four macroeconomic sectors (household, business, government, and foreign) and the level of aggregate income or production. The four-sector aggregate expenditures line combines consumption expenditures, investment expenditures, government purchases, and net exports. The slope of this aggregate expenditures line is based on the marginal propensity to consume, adjusted for marginal propensities of the other expenditures that are assumed to be induced when constructing the line. This is one of three aggregate expenditures lines based on the number of sectors included. The others are the two-sector aggregate expenditures line and the three-sector aggregate expenditures line.

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Today, you are likely to spend a great deal of time visiting every yard sale in a 30-mile radius looking to buy either a wall poster commemorating the 2000 Presidential election or a rechargeable flashlight. Be on the lookout for the last item on a shelf.
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The first "Black Friday" on record, a friday marked by a major financial catastrophe, occurred on September 24, 1869 -- A FRIDAY -- when an attempted cornering of the gold market induced a financial crises and economy-wide depression.
"The majority of men meet with failure because of their lack of persistence in creating new plans to take the place of those that fail. "

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