Föreläsning 4 Flashcards
What is the formula for aggregate demand?
Aggregate demand = investments + consumption
What decisions do consumers make regarding savings?
Consumers make savings and consumption decisions
What decisions do firms make?
Firms make investment decisions
What does the nominal interest rate (it) represent?
The nominal interest rate between period t and t + 1
If i = 0.04, what is the interest rate?
4%
What does 1 + it represent?
The price of money today in terms of money tomorrow
What does 1/1+it represent?
The price of money tomorrow in terms of money today
What is the discount factor?
To value future income
What does the real interest rate indicate?
The net amount by which we can consume more (less) next period if we consume one unit less (more) today
Why is it important to understand what determines investments?
Investments are approximately 20-30% of GDP and are correlated with GDP - if they go up so those GDP and vice versa, but they are also more volitile (move more forcefully than GDP.
How do firms finance their investments?
By borrowing money from households at the interest rate it
What is the effect on the firm’s profit when investing in capital?
Period t: Borrow and invest → profit is not affected
Period t+1: Ise newly invested capital in production , repay loan, capital depreciates (partially) → profit is affected.
What is the formula for total revenue increase from capital?
Total revenue increase = MPK * MR
When should a firm stop investing in capital?
Until the profit increase from additional capital is zero. The whole expression = 0. If not 0 we could borrow and get more capital. If it’s negative the revenue increasing and remaining capital will be lower than the loan, so the firm will increase the investment
What is the condition for optimal investments?
The marginal product of capital in the next time period divided by 1 + markup minus the depreciation rate. This should equal to the real intreset rate in the next time period.
If we are in perfect competition we dont have markup.
Monopolists raise the price by mark-up, produce less and use less capital.
Which factors affect the investment function?
The expected real interest rat, r (-)
Expected future aggregate demand, Ye (+)
Size of the existing capital stock, K (-)
