Saving and Investment Midterm 3

Saving and Investment Midterm 3 - Saving and Investment How...

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Saving and Investment: How it affects the Aggregate Demand Schedule Dynamic Aggregate demand schedule: Shifts when there is a change in gr rate of M or gr rate of V. Factors that affect Saving : Real Rate of interest, age demographics, temporary changes in GDP, changes in expected income, taxes Factors that affect Investment: Real rate of interest, Expected changes in Marginal Product of capital ( MP k ), permanent changes in MP k Shifts in Saving/ Investment schedule Changes in real rate of interest ( r ) Changes in velocity Dynamic Aggregate Demand Curve shifts Other factors: 1. Increase (Decrease) in consumer optimism Increase : People are optimistic about their future (in terms of output, work and income) This implies people will want to save less– presumably because people their income will rise. The decrease in saving due to the increase in consumer optimism implies the saving schedule shifts back. This results in higher interest rates and a lower level of investment and saving Since the interest rate rises, the opportunity cost of holding money increased, and people want to hold less money. This implies velocity increases and the dynamic aggregate demand curve shifts out (up).
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