Rubi Almanzar
ECO-201-05
Prof. Stamas
September 11, 2015
How The Economic Machine Works
The economy is driven by three simple forces, which are productivity growth, the short
term debt cycle, and the long term debt cycle. The productivity growth keeps track of rate
of production throughout a certain time period. It is the ratio of outputs to inputs in the
production process. In the short term debt cycle, spending increases in a short amount of
time, so prices will rise. If prices rise, there is an inflation, where interest rates increase.
The long term debt cycle keeps track of all the financial obligations that must be met over
a year.
The total spending is one of the most important factors of the economy. It drives the
economy since the amount of money that one person spends is someone else’s income.
Another important factor of the economy is credit, which is the biggest and most volatile
factor. When borrowers receive credit, their total spending increases. Debt results when a
credit is made because it becomes a liability to the borrower making use of that credit.
However, the lenders will not lend rich people money since they’re worthy of credit. The
increased income leads to increased borrowing, which ends up in increased spending.
In a deleveraging, spending gets cut, so the income levels decrease, which leads to the
drop in asset prices, as well as the crash of the stock market. This affects borrowers a lot
