CH. 10-11

CH. 10-11 - Investment CPI and MPC Ch 10 and 11 Chapter 10...

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Investment, CPI, and MPC Ch. 10 and 11 Chapter 10: Causes of the business cycle -Want to understand what causes a recession. You have cyclical unemployment only in a recession. - Spending (level of): the only determinant of economic activity. -Chapter 10 gives a preliminary account of business cycles. -The level of spending (Aggregate Expenditures ), cause these troths and booms of the business cycle. -Four kinds of spending: AE= C+I+G 1. Consumption spending (C), most important, accounts for 2/3 of total spending, US 2. Investment spending (I) 3. Government spending (G) 4. Net Exports (Xn) -In housing market, since it takes about a year to build a house and for it to reach the market, it is difficult to predict what the demand will be in a year. -A result of this the housing market is susceptible to mistakes, easy to over-supply or undersupply, therefore possibly causing a recession. -The housing market accounts for a significant percentage to the GDP. If this market screws up, then unemployment increases by a significant amount, and GDP will be significantly affected. Ex: 1920’s. Why was the economy doing so well? End of WWI, European countries had significant damage to productive infrastructure. The level of exports from the US to these countries increased dramatically. In addition, US banks provided huge loans, and got back interest. Also a second reason, three new consumer durables: cars, refrigerators, and radios were sold in huge quantities. Notion of credit came into being, which caused a massive increase in number of sales. Housing industry also booming, b/c US government had liberal immigration laws, which benefitted housing market. In late 20’s, US reversed immigration policy. Result was immigration slowed, yet houses continued to get built and supply exceeded demand. -If price of oil goes up (Cost push inflation), every other commodity will go up, since oil is integral to production. -Expectation of demand in the future: determines how much investment will be used today. Consumer spending has to increase for investment spending to increase in a recession. -Decline in exports: Europe now- buy less- lead to less aggregate expeditures (spending in U.S.) -Declines in defense budget: huge part of spending
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Chapter 11: -Disposable income: what is left after you pay taxes. -If income increases by a certain percentage, consumption will increase by an almost proportional amount. -Disposable income also determines level of savings. -Desavings: debt added because of over consumption. -Marginal Propensity to Consume (MPC):
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CH. 10-11 - Investment CPI and MPC Ch 10 and 11 Chapter 10...

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