Review Sheet - Exam 4

Review Sheet - Exam 4 - Review Sheet Fourth Exam Chapter 8...

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Review Sheet – Fourth Exam Chapter 8 Income-consumer relationship – how much money people get, and how much they spend. disposable income (rent, food, clothes, any wants/needs) Marginal Propensity to Consume (MPC) – The fraction of any change in disposable income spent for consumer goods: change in consumption change in disposable income Non-income determinants of consumption – Wealth – increase spending and reduce savings Expectations – rising prices tomorrow triggers more spending and less saving today. If price is going down, leads to reduced consumption and more saving. Interest rates – as rates are lower, households borrow more, spend more and save less. If there are high rates, households borrow less, spend less and save more. Indebtedness – when consumers increase their debt, they increase consumption Determinants of investment – Expenditures on new plants, new everything (equipment, machines, etc.) Businesses invest in projects where the rate of return exceeds the interest rate Investment demand curve – curve that slopes downward showing and inverse relationship between the real interest rate and the quantity of investment demanded in billions of dollars. As rates go up, investment goes down. Causes of shifts in the investment demand curve – acquisitions, maintenance and operating costs (higher electricity costs shifts the curve to the left, so you don’t invest as much when you have to take care of shit.) Business taxes – increased business taxes shifts graph to the left Technological change – new products (internet, television) Stock of capital goods on hand – under stocked, when they are selling as fast as production, graph shifts to the right. Overstocked moves to the left.
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