Midterm 2 Flashcards
factors of income that affect consumption 4
- amount of wealth owned by households
- borrowing
- expectations of future prices and incomes
- real interest rates and taxes
consumption schedules are
relatively stable
immediate determinants of investment
-expected rate of return
- real interest rate
investment demand curve is found by
summing investment projects, arranging in decending order according to the expected rate of return and graphing. Applying the rule that investment will be profitable up until point that the real interest rate (i) = expected rate of return (r)
investment demand curve shape
negative or inverse relationship between interest rate and level of aggreagte investment
shifts of investment demand curve happen by 6
- the acquisition, maintenance, and operating costs
- business taxes
- technology
- stocks of captial goods on hand
- planned inventory changes
- expectations
the multiplier
is the reciprocal of MPS
the greater the MPS, the smaller the multiplier
the greater the MPC, the greater the multiplier
difference between APC and MPC
APC is measure of how much disposable income is spent on average
MPC is the measure of how much consumption chnages when income changes
What is the exception to the consumption schedule
personal taxes. when this occurs consumption and savings move in the same direction which is opposite of the taxes
how is it possible for investment spending to increase even when real interest rates are increasing
as long as expected rates of return rise faster than real interest rates, interest spending may increase. most likely overal long periods of economic growth.
What are the variables on consumption and saving schedules and the relationship
consumption scjedule- consumption on y disposable income on x. pos related
saving schedule- saving on y, disposable income on x. pos realtionship
what will happen to investment when inventories are increasing
investment demand curve shifts right because increaing inventory is considered an investment
is gross GDP more variable than real GDP
yes. Real GDP is not variable
aggregate expenditures model views as what
total spending in economy as primary factor in determining level of real GDP
assuming prices are fixed.
keynes made this model after the great depression
investment schedules show what
how much investment the firms in an economu are collectively planning to make at each level of GDP
investment is a what
constant value and same at all levels of GDP
where is the investment constant derived from
derived from the investment demand curve by determining what quanitiy of investment will be determined at the economys current interest rate
for a private closed econonmy…
equilibrium GDP occurs where aggreagte expenditres and real output are the same (where C + Ig intersect the 45 degree angle)
at a level where GDP exceeds equilibrium
real output will exceed aggregate spending resulting in investment inventories and decline in output, and decline in income (GDP)
at equilibrium GDP
-saving ss and amount business plan to invest are equal
- no unplanned chnages in inventories occur
an exces of savings will cause
a shortage of total spending, causing a fall in GDP
the change in GDP will correct what
the discrepancy between saving and planned investment
when do unplanned inventories occur
when aggregate expenditres diverge from GDP. followed by a cut in production and a decline of real GDP
investment schedule vs investment demand curve
investment schedule shows the level of investment spending for a given GDP. Depends on GDP (positive relationship)
investment demand curve shows the rates of profit and real interest rates for a given level of GDP. does not depend on GDP (straight across)
When C+Ig > GDP
accumulate unplanned inventories
when C + Ig < GDP
run out of inventories faster than planned
At equilibrium GDP the inventories
there are no unplanned investment including no unplanned inventory changes
in a private closed economy aggregate expenditures are
C and Ig
AE= C + Ig
GDP = C+Ig
the aggregate demand curve is downward becuase 3
-interest rate effect
-real balances effect (as price level rises the real value (pruchasing power) decreases
- foreign purchase effect (as our own price levels rise we will import more)
short run aggregate supply
- output prices are flexible, input prices are inflexob;e
immediate short run aggregate supply
fixed prices
- horizzontal line
long run aggregate supply
output is fixed, verticle line
