KW_Macro_Ch_11_Sec_02_Investment_Spending

KW_Macro_Ch_11_Sec_02_Investment_Spending - chapter 11 >...

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>> Income and Expenditure Section 2: Investment Spending chapter 11 A major reason economists were so concerned about a possible fall in consumer spending after 9/11 was that there was no clear alternative source of aggregate demand that would offset a fall in consumer spending and keep the economy from plunging. At the time of the attacks, investment spending was in the midst of an 18- month slump and showed few signs of bouncing back. An increase in government spending would take too long to legislate and implement. And there was no feasible way to stimulate foreigners’ demand for American goods and services. Most economists viewed the ongoing slump in investment spending as the cause of the recession that had begun six months earlier in March 2001. As we know from the AS–AD model in Chapter 10, a fall in investment spending shifts the aggregate demand curve leftward, leading to a recession. In fact, most recessions originate as a fall in investment spending. Figure 11-5 illustrates this point; it shows the annual percent change of investment spending and consumer spending in the United States, both measured in 2000 dollars, during the last five recessions. As you can see, swings in
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2 CHAPTER 11 SECTION 2: INVESTMENT SPENDING investment spending are much more dramatic than those in consumer spending. In addition, due to the multiplier process introduced in Chapter 10, economists believe that declines in consumer spending are usually the result of a process that begins with a slump in investment spending. We’ll learn very soon how a slump in investment spending generates a fall in consumer spending through the multiplier process. Before we do that, however, let’s analyze the factors that determine investment spending, which are somewhat different from those that determine consumer spending. The most important ones are the interest rate and expected future real GDP. We’ll also revisit a fact from Chapter 9: the level of investment spending businesses actually carry out is sometimes not the same as the level they had planned to undertake. Figure 11-5 Consumer spending Investment spending 5% 0 –5 –10 –15 –20 –25 –30 Annual pe r cent change –26.8% –0.6% –1.2% –15.9% 1973–1975 1981–1982 1990–1991 1980 2001 Yea r 2.9% –22.5% –10.1% –1.1% –10.6% 2.4% Fluctuations in Investment Spending and Consumer Spending The bars illustrate the annual percent change in investment spending and consumer spending during the last five recessions. As the lengths of the bars show, swings in investment spending were much larger in percentage terms than those in consumer spending. This has led economists to believe that recessions typically originate as a slump in investment spending.
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The Interest Rate and Investment Spending Planned investment spending is the investment spending that firms intend to undertake during a given period, in contrast to investment spending that occurs but is unplanned . Planned investment spending depends on three principal factors: the
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KW_Macro_Ch_11_Sec_02_Investment_Spending - chapter 11 >...

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