Midterm 1 Chapter 12 pages 382 - 394 Flashcards
Four variables that determine level of planned investment
- expectations of future profitability (optimism and pessimism are very important )`
- interest rate
- taxes
- Cash flow
Interest rates affect on I
they are inversely related, increase in interest rate causes decrease in investment
Taxes affect on I
decrease in corporate income taxes and other incentives for businesses cause increase in investment
Cash Flow affect on I
Cash flow = difference between revenues by the firm and the spending done by the firm. Higher cash flow more investment
what goes Government payments not include
Transfer payments: Social security, or pensions payments
what happens to net exports when US economy is a in a recession
usually, net exports increase
variables that determine level of net exports
price level of US relative to price level in other countries
Growth rate of GDP relative to other countries
exchange rate between dollar and other currencies
on the graph what is the 45 degree line called and what lies on the line
The Keynesian cross and equilibrium is on the line
what is the point where the AE line crosses the 45 degree line
that point is equilibrium for the economy also known as potential GDP
what happens at potential GDP
firms operate at normal capacity, and the economy will be at natural rate of unemployment
What variable is very important in the AE
inventories (they either go up or down or remain the same )
what is the multiplied effect from an increase in planned investment spending
causes any autonomous expenditure ( expenditure that doesn’t depend on level of GDP) to go up
multiplier effect
when an increase in autonomous expenditure leads to a larger increase in real GDP
how to do you find the multiplier?
increase in equilibrium real GDP divided by the increase in autonomous expenditure
multiplier formula
1 / (1 - MPC)
