FINAL REVIEW

FINAL REVIEW - Chapter 10 MPC, MPS, APC, APS know how to...

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Chapter 10 MPC, MPS, APC, APS – know how to calculate, know the definitions Average Propensity to Consume is the fraction or percentage of disposable income that households plan to spend for consumer goods and services. APC = Consumption Income Average Propensity to Save is the fraction or percentage of disposable income that households save. APS = _Saving_ Income Marginal Propensity to Consume is the fraction of any change in income consumed. MPC = Change in Consumption Income Marginal Propensity to Save is the fraction of any change in income saved. MPS = Change in Savings Income Non-income determinants of consumption –what are they, how do they impact consumption (also graphically) Wealth: an increase in wealth shifts consumption schedule up and saving schedule down Expectations: expectations of rising prices tomorrow will increase consumption and decrease saving Real interest rates: decreasing interest rates increase the incentive to borrow and consume, and reduce the incentive to save. Household debt: lower debt levels increase consumption and decrease saving Taxation: lower taxes will increase both consumption and saving. Investment : expected rate of return and real interest rate – know how to calculate both and how they relate to investment The expected rate of return is the increase in profit a firm anticipates it will obtain by purchasing capital; expressed as a percentage of the total cost of the investment activity. r = TR – TC investment The real interest rate [ i ] determines the cost of investment. If r > i make investment If i > r DON’T make investment Non-interest rate determinants – how do they impact investment demand Acquisition, maintenance, and operating costs of capital goods may change; higher costs lower the rate of return Business taxes may change; increased taxes lower the expected return Technology may change. Technological change often involves lower costs, which would increase expected returns. Stock of capital goods on hand will affect new investment. If there is abundant idle capital on hand because of weak demand or recent investment, new investments would be less profitable.
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Expectations about future economic and political conditions, both in the aggregate and in certain specific markets, can change the view of expected profits. Multiplier effect – what is it and how is it calculated, relationship to MPC and MPS Multiplier = _Change in GDP_=_______1______=______1______ Change in Saving MPS 1 - MPC A small change in investment or consumption/saving can trigger a large change in the equilibrium level of GDP. Chapter 11 Model simplifications: private closed economy *what happens to equilibrium if consumption or investment demand changes If consumption/investment ↑or ↓ then equilibrium GDP will ↑ or ↓ Equilibrium GDP is where real GDP (DI) = aggregate expenditures Model: private open economy *what happens to equilibrium if consumption, investment demand, or net exports changes
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This note was uploaded on 09/26/2011 for the course MACRO 211 taught by Professor Hoffman during the Spring '11 term at UNL.

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FINAL REVIEW - Chapter 10 MPC, MPS, APC, APS know how to...

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