Econ Feb 4th - Investment and planned investment In...

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Econ 2006 February 4, 2008 Price level increases by ten percent what happens to the ______ wage? Y= Y f = F (L f ) What assures that all of full employment output is purchased by agents in the economy? How is output distributed across C, I, G? Y f = C + I + G Output Demand and Loanable Funds Market For now we ignore the foreign sector and treat the economy as a “closed” economy, NX = 0 Definition: T = Net taxes = Total taxes – transfer payments Consumption 1. Consumption depends upon a. Disposable income = Y-T, with change of C/ Change of (Y-T) > 0. b. The rate of interest, R, with change in C/ change in R < 0 Household saving = Y – T – C = supply loans C+ saving = Y - T Investment Firms purchase output to increase the capital stock or to replace worn-out capital. This is called planned investment, denoted by I Planned investment is a function of the interest rate, R, i.e. I p = I p = ®. With change in I p / change in R < 0 I p = Demand for loans
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Unformatted text preview: Investment and planned investment In measuring GDP we have seen total investment includes the change in firms’ inventories. So in national income accounts, that is GDP accounting, total investment is the sum of planned investment and the change in inventories: I = Total Investment = I p + change in inventories. Note: It is always the case that Y = C + I + G + NX Only when the output market is in equilibrium will it be the case that Y = C + I p + G + NX Government Purchase, G Total government spending = G + transfer payments This spending is financed with taxes or by borrowing so G + transfer payments + = Total taxes + loans or G- T loans to the government T = Net taxes = total taxes – transfer payments Supposed Y = Y f >C + I p + G what happens? Answer: the rate of interest, R, will decrease. This causes 1. Consumption to increase and 2. Planned investment to increase R continues to decrease until……. ....
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