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9-5-2007 - will decrease total investment demand I^p=I^p(R...

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Economics 9-5-2007 Y= F(L) Output is a function of employment. Classical Labor Market Total output is determined by total employment. What determines employment in the classical market? Answer: A clearing labor market in which the quantity supplied of labor equals the quantity demanded. Let W be the nominal wage, that is, W=$/Labor. Then the real wage is w=W/P = Widgets/Labor Some assumptions: 1. Labor supply, L’ is an increasing function of the real wage. 2. Labor Demand, L^D is a decreasing function of the real wage. Demand for Output by Firms, I^p - Firms purchase output to increase the capital stock, or to replace worn-out capital. This is called “planned” investment, denoted by I^p. Firms will finance investment by borrowing in the loans market. - Planned investment is a function of the interest rate, R. An increase in the rate of interest
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Unformatted text preview: will decrease total investment demand. I^p=I^p(R), with Change in I^p / Delta R <0-Planned investment- firms demands for loans=I^p In measuring GDP we have seen total investment includes the change in firms inventories. So in Nationsl Income accounts, that is, in GDP accounts, total investment is the sum of planned investment and the change in inventories. Total Investment= I^p + Delta(inventories) It is always the case that Y= C+I+G+NX The governments demand for output: We denote total government purchases of widgets, goods and services, by G. Total spending is Total spending= G+ Transfer payments This spending is financed with taxes or by borrowing, so G+Transfer payments= total taxes + government demand for loans....
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