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
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
-Four kinds of spending: AE= C+I+G
1. Consumption spending (C), most important, accounts for 2/3 of total spending,
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
-Decline in exports: Europe now- buy less- lead to less aggregate expeditures (spending
-Declines in defense budget: huge part of spending