Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Macroeconomics > Consumption and Investement > Flashcards

Consumption and Investement Flashcards

1
Q

Consumption of forward-looking consumer depends…

A

on total wealth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Total wealth contain?

A

-Financial wealth
-Housing wealth
-Human wealth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Financial wealth

A

The value of checking and saving accounts, stocks and bonds net of liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Housing wealth

A

The value of the house owned and other real estate net of the mortgages

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Human wealth

A

Present value of the after-tax labor income over the working life

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How expectation of higher output in the future affect consumption today ?

A
  • Expected future output increases
    –> Expected futur labor income increase
    –> Human wealth increases
    –> Consumption increases
    –> Expected future dividends increase
    –> Nonhuman wealth increases
    –> Consumption increases

=Consumption may move even if current income does not change –> depend more on current sales, current real interest and expectation of the future.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Investement depends positively on ?

A

on the expected present value of future profits (per unit of capital)
–> The higher the expected profits, the higher the expected present value and the higher the level of investment.
= consumption can move even if current income doesn’t change

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What determine profit per unit of capital?

A
  1. The level of sales
  2. The existing capital stock
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

permanent income theory of consumption

A

The modern theory of consumption

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Household budget constraint

A

C t + ( A t + 1 − A t ) = W t/ Pt x L st + r t A t − T t

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Theory of Investement

A

compare the present value of expected profits with the present value of the cost (example: price of a new maschine)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

The expected present value is equal to:

A

the discounted value of expected profit next year, plus the discounted value of expected profit two years from now (taking into ac- count the depreciation of the machine), and so on.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Present value of the expected, discounted real prots generated by the investment: (formula)

A

V (Πe ) = Πet+1/(1 + rt) + (1 − δ)Πet+2/ (1+rt)(1+re ) + …

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

The depreciation rate δ per year quantie

A

how long the machine will last

Example:
Machines: δ is 4%-15%
Buildings and factories: δ is 2%-4%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

If the present value is less than 1 what should do the firm? (investment)

A

the firm should not buy the machine.
–> If it did, it would be paying more for the machine than it expects to get back in profits later

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

If the present value exceeds 1. what should do the firm ? (investment)

A

the company is encouraged to buy the new machine

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Investment depends positively on ?

A

both on the expected present value of future profits and on the current level of profit.
–> The higher the expected profits, the higher the expected present value and the higher the level of investment
–> The higher expected real interest rates, the lower the expected present value, and thus the lower the level of investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Special case for constant interest rates and prots, equal to their current value:

A

V(Πet)= Πt / rt + δ

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

User cost (calculation)

A

rt + δ

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Investment (calculation)

A

It =I(V(Πet))

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

In the special case (user cost and investement, calculation)

A

It = I( Πt/ rt +δ )

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Investement definition

A

is a function of the ratio between the prot per unit of capital and the user cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What determine profit per unit of capital?

A
  1. The level of sales
  2. The existing capital stock
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Profit per unit of capital is what as a function?

A

is an increasing function of the ratio of sales to the capital stock. For a given capital stock, the higher the sales, the higher the profit per unit of capital. For given sales, the higher the capital stock, the lower the profit per unit of capital.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

user cost/ rental cost of capital (definition)

A

the total cost incurred by a firm for using a capital asset over a specific period (Depreciation, Maintenance Costs, Opportunity Cost, Financing Costs)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Tobin’s Q purpose

A

constructed a variable corresponding to the value of a unit of capital in place relative to its purchase price and looked at how closely it moved with investment

Relationship between
- Stock market: valuation of an already invested unit of capital
-Purchase price for a new unit of capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Tobin q : what is representing the symbol q ?

A

He used the symbol q to denote the variable (from the definition) , and the variable has become known as Tobin’s q.

28
Q

Empirical computation for equity-financed firms:

A

share price times the number of shares, divided by the value of the capital stock (at current purchase price)

29
Q

Q > 1 (tobin q)

A

This suggests that the market values the firm more than the cost of replacing its assets, possibly indicating overvaluation.

30
Q

Q < 1

A

This indicates that the firm’s assets are valued by the market at less than their replacement cost, which may suggest undervaluation or inefficiency.

31
Q

Q = 1

A

implies that the market value equals the replacement cost, suggesting the firm is neither over- nor undervalued.

32
Q

In theory in Tobin’s Q : relationship between investement and stock market

A

a high correlation is expected between investment and stock market values. T

–> This is because stock prices reflect the present value of expected future profits. A higher stock price signals greater expected returns, which should incentivize firms to invest more in capital, expansion, and other projects.

33
Q

Empirically in Tobin’s Q : relationship between investement and stock market

A

current profits (cash flows) often have a greater impact on investment decisions than would be suggested by the theoretical relationship between stock prices and investment (i.e., present value models). This suggests that firms may prioritize their current profitability and internal funds over the broader stock market signals.

34
Q

Volatility of consumption and Investment: effect with the GDP

A
  • Investement is more volatile than GDP

–> investment decisions : influenced by factors like interest rates, business expectations, and economic uncertainty (react to change in the economy)

  • Consumption less volatile than GDP:
    –> Consumption is primarily driven by households, and households generally prefer to smooth their consumption over time.
    –> Even if Income falls they will use their saving or borrowing to maintain their consumption levels
35
Q

Cosumption and investement move together : during expansion

A

higher income, employment, and confidence typically lead to both increased consumption and investment. Households spend more, and businesses invest more in capacity, responding to higher demand.

36
Q

Cosumption and investement move together : During recessions

A

lower income, uncertainty, and reduced demand lead to lower consumption and investment. Businesses delay or reduce investments, and households cut back on spending.

37
Q

Extension of the IS curve

A

Y =A(Y,T,r,x,Y′e + ,T′e,r′e,x′e)+G

38
Q

Y =A(Y,T,r,x,Y′e + ,T′e,r′e,x′e)+G, what is A ?

A

A = aggregate private spending/ private spending

39
Q

Increase of A

A

Increases in either current or expected future income increases private spending

40
Q

Decrease of A

A
  • Increases in either current or expected future Taxes
  • Increases in either current or expected future real policy
  • Decrease private spending
41
Q

New IS curve (with consequences of A)

A

The new IS curve is steeper (see representation page 18)

A lower interest rate has a smaller eect on output
Reasons:

  • A fall of the current interest rate has no strong effect on expenditures unless it is accompanied by a fall of expected future interest rates

-If income changes only transitorily, the eect on consumption and investment is small

42
Q

IS curve: a change in any variable (other than Y or G) has which impact ?

A
  • shifts the IS curve

–> Change in current Taxes or current gouvernemet expenditure shifts the curve IS :
-increase G : shift to the right
-Increase I : shift to the left
–> An increase in future output –> shifts the IS curve to the right

43
Q

The Effects on an Expansionary Monetary Policy (IS-LMO

A

The effects on monetary policy on output depend very much on whether and how monetary policy affects expectations

44
Q

See page 20 : image of IS- LM what do you notice?

A

The equilibrium moves from point A to point B, with higher output and a lower real interest rate. The steep IS curve, however, implies that the decrease in the current interest rate has only a small effect on output.

45
Q

Monetary policy : If expectations about future interest rates and demand are unchanged, how is the effect on LM- IS)

A

the effect is small - from A to B (image page 20)

46
Q

The effect on monetary depends particulary ?

A

The effects of monetary policyon output depend very much on whether and how monetary policy affects expectations.

47
Q

Expectations of persistently low real interest rates (and high future demand, e.g. through forward guidance) stimulate current demand and output so that ? (image IS-LM page 20)

A

so that point C is attained

48
Q

If a monetary expansion leads financial investors, firms, and consumers to revise their expectations of future interest rates and output, then …

A

the effects of the monetary expansion on output may be large.

–> But if expectations remain unchanged, the effects of the monetary expansion on output will be limited.

49
Q

How do agents form expectations?

A
  1. Standard assumption (forward looking, rational)
  2. Alternative assumption (backward lookig, adaptive learning)
50
Q

rational expectations definition

A

expectations formed in this forward-looking manner

51
Q

The Effects of a Deficit Reduction on Current Output with expectation (page 26)

A

When account is taken of its effect on expectations, the decrease in government spend­ ing need not lead to a decrease in output.

52
Q

backloading

A

The smaller the current cuts of government expenditures and the larger the cuts in the future, the stronger is the positive demand ect.

53
Q

backloading can reduce what ?

A

the credibility of the deficit reduction because the largest cuts are postponed to the future

54
Q

Debate of the crisis of the euro area

A

Advocates of quick consolidation of government finances:
- Fiscal multiplier probably small or even negative
-Net effect of consolidation on economic activity is positive if both the direct eect and the eect on expectations are taken into account

Opponents of quick consolidation of government nances:
-The fiscal multiplier is positive in an economy with slack capacity
- Deficit reduction implies a further fall in output, at least a slower recovery

55
Q

How much of the reduction in the deficit is achieved by raising taxes and how much by cutting spending, may be important

A

If some government spending programs are perceived as “wasteful,” cutting these programs today will allow the government to cut taxes in the future. Expectations of lower future taxes and lower distortions could induce firms to invest today, thus raising output in the short run.

56
Q

Deficit reduction

A

refers to the process of narrowing the gap between a government’s revenues (primarily from taxes) and its expenditures. When a government spends more than it collects, it runs a budget deficit. Deficit reduction aims to either cut down spending, increase revenues, or a combination of both to reduce the shortfall and eventually bring the budget closer to balance or surplus.

57
Q

Effect of the announcement of a program of deficit reduction?

A
  • the government has regained control, and that the future is less bleak than they anticipated.
    -increase in spending and output
  • Lower interest rates for the government are likely to translate into lower interest rates for firms and people.
    -Investors who thought that the government might default on the debt and were asking for a large risk premium may conclude that the risk of default is much lower and ask for much lower interest rates.
58
Q

Adaptive expectation

A

assumed to adapt by raising their expectation for the value of the variable for the following period

59
Q

Animal spirts

A

movement in investement that could not be explained by movements in current variables –> expectation were considered but were largely unexplained

60
Q

The user cost and the level of investment are negatively correlated. Why ?

A

higher user costs reduce the expected returns on investment, making firms less likely to invest in new capital.

61
Q

fluctuations in output who contribute ?

A

Investment and consumption contribute roughly equally to fluctuations in output.

62
Q

user cost

A

the total cost of using a unit of capital for a period

63
Q

When the user cost increases, it becomes more expensive for firms to use capital, which discourages..

A

investement

64
Q

A credible central bank

A

is one that is trusted by the public, financial markets, and economic agents to follow through on its stated monetary policy objectives and commitments

65
Q

Transitory interest

A

refers to a temporary or short-term interest rate that is expected to change or revert to a long-term trend after a certain period.

66
Q

current output Y has decreased, What will happend ?

A
  • Expected future output Y ′e decreased
    -The government decreased current expenditures G

Macroeconomics (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions