Midterm Review_AAP-09_B&W

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

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

This note was uploaded on 03/02/2010 for the course BUAD 350 taught by Professor Safarzadeh during the Spring '07 term at USC.

Ask a homework question - tutors are online