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  1. Range of interest rate.

  • Risk 1. Loans for different purposes ceryy varying degreesof risk 2. The greater the chance that the borrower will not repay th loan 3. The more intrest the lender will charge to compensate for this risk

  • Maturity (the time length) 1. Long term loans command higher intrest rate than short-term loans 2. Long-term lender suffer the inconvenience and possible financial sacrifice of alternative uses for a greater period of time

  • Loan size 1. Of equal maturity and risk the intrest rate on the smaller of the two loans ussually will be higher

  • Market imperfection 1. The small-town bank which monopizes local, lending may charge high intrest rate.

  1. Monetary policy and equilibrium gdp.

  2. Effectiveness of monetary policy: strengths and weaknesses


  • Speed and flexibility-CB can buy or sell securities on a daily basis and so affect the money supply and intrest rate almost immediately

  • Isolation from political pressure- monetary policy is a more politically conservative measure. It warks more subtle.( changes in government spending and taxes can have extensive political ramification)


  • Less control- banking and finance are increasingly global. It may reduce or make less predictable

  • -changes in velocity- during reccession CB instituts easy-money policy. But when the intrest rate is lower the public will hold larger money. Balances money bills will move from hand-to-hand less rapidly-the velocity will decline.

  • -intrest as income. For those who pay intrest a decline in the intrest rate increases spending. For those who view intrest rate as income a decline reduces spending. It partly offsets and weakness spending of goods, homes...

  1. Income inequality: causes.

  • Ability differences – people have different mental, physical talents

  • Education and training – people must develop their capabilities through education and training. Individuals differ in almost of education so in their capacities to earn income

  • Discrimination- suppose ethnic minorities or women to low paying occupation

  • Tastes and risks – people who choose to stay home with children, work part-time have less income that people who make the opposite choice

  1. The Lorenz curve.

The Lorenz curve shoes degree of inequality in income distibution. The dialonal line represents a perfectly equal distribution of income. Because each of its points indicates that a particular persentage of families receive the same percentage of income. A area shows the degree of income inequality. So area B shows the greater income inequality. Lorenz Curve can be plotted to contrast the income distribution of different racial groups different countries befor and after taxes.

  1. The economics of poverty. Poverty rate.

Poverty – condition in which a person or family doesn`t have the means to satisfy basis needs for food, clothing, shelfer and transportation. The means include currently earned income, transfer payment, saiving and property owned. Basis needs include family size, health and ages of its members.

Poverty rate – the persentage of the population living in poverty. Much poverty is hidden.

PR=Q living up/Q population

  1. Welfare: goals and criticism of welfare system.

Welfare – public assistance program. Goals:

  • Be effective in getting out individuals and families out of poverty

  • Provide adequate incentives for able nonretired people to work.

  • Program`s cost should be “reasonable”

Criticism of welfare system:

  • Administrative inefficiency – haphazard growth of welfare has created an inefficient system characterized by depence on a huge administrative buracraty which absorbs valuade funds that could be going to the poor

  • Inequality – because regions can set their own benefit levels

  • Lack of work incentives – the welfare system reduce incentives to work

  • Dependency – long-term welfare payments create “a culture of poverty” because it creats dependency on the government, robbing family.

  • High program cost

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