Midterm Review_AAP-09_B&W

Markets are in equilibrium the 3rd is as well if 19

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Unformatted text preview: ings • Goods market equilibrium ensures Goods Produced = Goods Demanded Goods If 2 markets are in equilibrium the 3rd is as well! If 19 Demand For Investment • I is the gross addition to K in each period • The investment vs. interest rate curve (MPK) is downward sloping Recall Recall R/P = r + δ A higher real interest rate increases the user cost of higher capital and thus reduces desired investment Desired I = (Desired) K – K0 + δ K0 > 0 decreases as R/P increases, Since K Since (desired) I decreases as R/P increases 20 Supply of Savings • Household’s decision to consume is based Household’ on its income and the interest rate Savings = Income - Consumption The consumption and savings decisions are two The sides of the same coin • For now assume that savings are either fixed or ↑ with the interest rate (holding Y constant) Theory of the consumption-savings decision will Theory consumptioncome later Supply of Savings is upward sloping Supply 21 Equilibrium • The demand components in the economy depend...
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