10-1-09 - ECONOMICS 100B Professor Martha Olney Lecture 11...

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ECONOMICS 100B Professor Martha Olney 10/1/09 Lecture 11 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS Midterm is on Tuesday, October 6 LECTURE Outline Investment Real Exchange Rate GX and IM Questions on the Midterm Student: Do we need to know the appendix to Chapter 6 for the exam? No. You also do not need to know 6.1. But you have to familiarize yourself with 6.2 and 6.3. Student: Do we need to know how to use the graphs in 6.2 and 6.3. Yes. Student: What questions should we focus on from the study guide? Section C and D questions are most like midterm questions. Section A consists of more multiple choice questions. Section B is problem set questions. And Section E requires critical thinking. Investment We have talked about investment before. But I will remind you of our notation. Uppercase “I” stands for investment. This is spending by businesses for new construction of buildings, the purchase of equipment or machinery, and changes in inventory holdings. When we talked about investment, it was in the context of the real interest rate and how profit maximizing businesses choose whether or not to make an investment. So investment is a function of the expected rate of return and the real interest rate, r. ܫ ൌ ܨሺ݁ݔ݌݁ܿݐ݁݀ ݎܽݐ݁ ݋݂ ݎ݁ݐݑݎ݊, ݎሻ Businesses will invest if the expected rate of return, rr e is greater than the real interest rate. Businesses will not investment if the expected rate of return is less than the real interest rate. ݎݎ ൐ݎ ݐ݄݁݊ ܾݑݕ ܭ ݎݎ ൏ ݎ ݐ݄݁݊ ݀݋ ݊݋ݐ ܾݑݕ ܭ Hopefully, you’ll recall that the real interest rate is the nominal interest rate less the inflation rate. If the real interest rate and the nominal rate are equal,
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Economics 100B ASUC Lecture Notes Online: Approved by the UC Board of Regents 10/1/09 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2 This is not necessarily the case in the real world but for our purposes, we will make this simplifying assumption. We will now describe investment in the form of an equation: ܫൌܫ െܫ ݎ െܫ ∆ܫ ∆ݎ ݀ܫ ݀ݎ I 0 and I r are the parameters of the equation. I and r are the variables. Suppose we have the following equation:
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10-1-09 - ECONOMICS 100B Professor Martha Olney Lecture 11...

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