final review - FINAL REVIEW GUIDE CH 9 Investment spending...

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FINAL REVIEW GUIDE CH 9 Investment – spending on (1) new factories, office buildings, equipment, etc.; (2) new housing; and (3) net increases to inventories Investment and interest – firm will invest in any project with a rate of return that exceeds the market interest rate (i.e. if interest rate is 8%, firm will invest an amount of money that will earn them 10% per se) Inverse relationship between the quantity of investment demanded and the market interest rate If interest rate increases then the opportunity costs of investing increase which results in a lower amount of investment Autonomous investment – planned investment that is independent of disposable income Aggregate expenditure – AE = C + I + G + NX, consumption, investment, government spending, and net exports CH 10 AE = C + I + G + (X-M) = GDP Aggregate expenditure shows how much households, firms, governments, and the rest of the world plan to spend on U.S. output at each level of real GDP, or real income Aggregate output demanded at a given price level occurs where planned aggregate expenditure equals real GDP For a given price level, there is only one point along the aggregate expenditure line at which planned spending equals real GDP Planned investment – amount of investment firms plan to undertake in a year Increase in planned spending – economy follows path of increasing production and demand for real GDP until it reaches equilibrium again Simple spending multiplier – ratio of change in real GDP demanded to the initial change in spending that brought it about ___1 ___ 1 - MPC ΔGDP = multiplier (ΔE) = __ΔE ___ 1 – MPC Aggregate demand curve real GDP demanded is inversely related to the price level, downward sloping curve Higher price level reduces consumption, planned investment, and net exports, which all reduce aggregate spending which reduces real GDP demanded Lower price level increases C, I, and NX at each real GDP An increase in E, say in I, results in an outward shift of the AD curve as real GDP increases and visa versa
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