lesson 5- investment + lesson 6- government spending Flashcards
what % of aggregate demand does investment make up?
15%
what is investment?
the addition to the capital stock of the economy
what are the two types of capital?
physical and human
what is a reduction in value of physical capital?
depreciation/capital consumption
how much of planned investment is using retained profit?
70%
what happens to planned investment when interest rates rise?
decreases
what happens to planned investment when interest rates decrease?
increases
what are the factors that affect investment?
-expected and actual demand for goods and
services
-cost of investment
-availability of credit
-retained profit
-confidence
-availability of investment projects
-risk
-government intervention
what is the accelerator theory?
-in a industry where demand is rising quick:
-firms may initially respond by using existing factors of production more intensively
-if they expect more increase in demand, they may increase spending on capital to increase their supply capacity
-this causes an accelerator effect, as a given change in demand causes a bigger percentage change in demand for capital goods
how much of aggregate demand does government spending make up?
20-25%
what is a government budget surplus?
the government gains more money in taxes than it spends on services
what is a government budget deficit?
the government gains les money in taxes than it spends on services
what is the total amount of government borrowing called?
national debt
-has to be payed back with interest
how does the government borrow money
by selling bonds
- a government bond/ gilt is basically a IOU with interest
-bought by financial institutions, who make profit
-larger debt= more interest on the bonds
