CurveShifts - Shifts in the Curves of the Labor Goods and...

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Unformatted text preview: Shifts in the Curves of the Labor, Goods and Asset Markets Goods Market (Chapter 4) Desired Savings ( ) G C Y S d d-- = • Current Output – An increase in GDP increases desired savings since d C does not increase one-for-one with the increase in Y . • Expected Future Output – An increase in expected future GDP decreases desired savings since d C increases with the expected increase in future income. • Wealth – An increase in wealth decreases desired savings since d C increases with the increase in wealth. • Government Spending – An increase in G leads to a decline in desired savings since no matter how the government spending is financed (higher taxes or higher expected future taxes) the decline in d C will not be as large as the increase in G since d C does not fall one-for-one. • Tax on Labor Income – An increase in the tax on labor income will either increase desired savings since d C will fall with higher taxes or leave desired savings unchanged if households are forward looking and anticipate that an increase in taxes today will allow for a cut in taxes in the future. Desired Investment ( ) d I • Effective Corporate Tax Rate – An increase in the corporate tax rate will decrease desired investment. • Expected Future Marginal Product of Capital ( ) f MPK- An increase in f MPK will increase desired investment. In a Cobb-Douglas world, 1 1 1 1 dY N Y A K N MPK A K N A dK K α α α α α α α---- = ⋅ ⋅ ⇒ = = ⋅ ⋅ ⋅ = ⋅ ⋅ . • Technology – An increase in technology ( ) A increases the marginal product of capital. • Labor Force – An increase in the labor force ( ) N increases the marginal product of capital. Asset Market (Chapter 7) Real Money Demand ( ) + = e d r Y L P M π , • Current Income – An increase in Y leads to an increase in real money demand since households want to make more transactions as their incomes increase. • Expected Inflation – An increase in e π leads to a decline in real money demand since money becomes a hot potato with households unloading real money balances to beat the expected increase in prices. Alternatively, an increase in e π leads to an increase in the return on non-monetary assets. leads to an increase in the return on non-monetary assets....
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This note was uploaded on 05/13/2010 for the course ECON 323 taught by Professor Jakes during the Spring '10 term at Alcorn State.

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CurveShifts - Shifts in the Curves of the Labor Goods and...

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