Tutorial_CHAP17

Tutorial_CHAP17 - CH APT ER 17 I nvestment A Pow er Point T...

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Chapter Seventeen 1 ® CHAPTER 17 I nvestment A PowerPoint Tutorial To Accompany M ACROECONOM I CS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian
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Chapter Seventeen 2 Investment spending is aimed at providing a higher standard of income in the future. In this chapter, we’ll explain why investment is negatively related to the interest rate, what causes the investment function to shift, and why investment rises during a boom and falls during a recession.
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Chapter Seventeen 3 Business fixed investment includes the equipment and structures that businesses buy to use in production. Residential investment includes the new housing that people buy to live in and that landlords buy to rent out. Inventory investment includes those goods that businesses put aside in storage, including materials and supplies, work in progress, and finished goods.
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Chapter Seventeen 4 The standard model of business fixed investment is called the neoclassical model of investment. It examines the benefits and costs of owning capital goods. Here are three variables that shift investment: 1) the marginal product of capital 2) the interest rate 3) tax rules To develop the model, imagine that there are two kinds of firms: production firms that produce goods and services using the capital that they rent and rental firms that make all the investments in the economy.
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Chapter Seventeen 5 To see what variables influence the equilibrium rental price, let’s consider the Cobb-Douglas production function (recall in Chapter 3) as a good approximation of how the actual economy turns capital and labor into goods and services. The Cobb-Douglas production function is: K Capital stock, K Real rental price, R/P Capital demand (MPK) Capital supply
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Chapter Seventeen 6 The marginal product of capital for the Cobb-Douglas production function is MPK = α A(L/K) 1- α . Because the real rental price equals the marginal product of capital in equilibrium, we can write R/P = A(L/K) 1- α . This expression identifies the variables that determine the real rental price. It shows the following: the lower the stock of capital, the higher the real rental price of capital the greater the amount of labor employed, the higher the real rental price of capitals the better the technology, the higher the real rental price of capital. Events that reduce the capital stock, or raise employment, or improve the technology, raise the equilibrium real rental price of capital.
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For each period of time that a firm rents out a unit of capital, the rental . Finally, we want to express the cost of capital relative to other goods in the cost of buying and renting
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8 decrease its capital stock. For each unit of capital, the firm earns real Because the real rental price equals the marginal product of capital, we depends on the exceeds falls short of the cost of capital, they let their capital stock shrink, thus:
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This note was uploaded on 04/29/2009 for the course ECO 3302 taught by Professor Avdjiev during the Spring '08 term at SMU.

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Tutorial_CHAP17 - CH APT ER 17 I nvestment A Pow er Point T...

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