Before I start to talk about money, banking, and finance, there is some stuff to remind from macroeconomics.
What is potential GDP and what determines that?
Potential GDP is The highest level of GDP that a country can achieve without accelerating inflation by using both labor and capital, which are factors of production. The word 'inflation' in this sentence is the magic key to understanding the economy. If the Potential GDP is above the Actual GDP, we can say a recession is coming. On the other hand, the economy is overheating.
Between those gaps, we can control or make some policies by measuring the recession and overheating. Potential GDP can be viewed as the economy's speed limit. Then what determines potential GDP?
- Growth of the Labor force
- conventions regarding workweek
- productivity Growth
Generally speaking, the Trajectory of potential GDP is equal to the growth rate of the labor force + the growth rate of productivity.
Trajectory of Potential GDP = Growth rate of labor force + Growth rate of productivity
Then, could a slower trajectory of Productivity imply a slower trajectory for GDP? The answer is Yes. Productivity and labor force are interactive with GDP. In that situation, What kind of action does the FED need to do? This question is the main component of money banking and finance that I will talk about.