Test 1 Flashcards
Savings Function Formula
S = -a + (1-b) Yd
Address (1-b) in the savings function:
- (1-b) is the slope of the savings function
- (1-b) is the marginal propensity to save (MPS)
- (1-b) or MPS identifies the change in savings given a one dollar change in disposable income
Business Sector
- employ household sector
- create household income
- producing goods + services
- pays taxes
- engages in investment
Realized Investments =
Business Fixed investment + residential construction spending + inventory accumulation
Inventory Accumulation =
Intended inventory accumulation + unintended inventory accumulation
Assume:
Firm holds $10,000 of inventory
Firms already holding $12,000 of inventory
Intended Inventory Accumulation = $10,000
Inventory accumulation = $12,000
Unintended Inventory Accumulation = $2,000
Given unintended inventory accumulation:
- prices decrease
- production falls
- employment decreases
- income decreases
Given unintended inventory depletion:
- prices increase
- production rises
- employment increases
- income increases
Realized investment will ___ intended investment if and only if there are _____ unintended inventories
equal, no
How much money will firms spend on physical capital?
Classical Theory of Investment spending:
- firms identify potential investment projects
- firms rank project based on expected rate of return
Firms will invest in projects if the ____ greater than or equal to than the _____.
expected rate of return, the cost of borrowing
Aggregate Demand (AD)
defined as the demand for all newly produced final goods + services
Aggregate demand =
Household consumption spending + business investment spending + government spending + foreign spending on U.S. goods and services
AD = C + I + G + F
What will shift the Aggregate Demand Curve?
any change in spending by any of the sectors will shift the AD curve
Aggregate Supply (AS)
defined as the supply of all newly produced final goods + services
