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Econ102 exam II notes p3

Econ102 exam II notes p3 - What's less obvious is why a...

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Econ102 notes for exam II notes: p3 · If firms are optimistic about the future, they're likely to invest more at any interest rate. · Likewise, if firms are pessimistic about the future, they're likely to invest less. · Economist John Maynard Keynes referred to investors' feelings about the future as the animal spirits of entrepreneurs. · But what influences expectations? One thing is aggregate output. If aggregate output is falling firms are more likely to be pessimistic and decrease investment. If it's rising, firms are more likely to be optimistic and increase investment. · An increase in aggregate output leads to greater optimism and investment, which leads to a further increase in aggregate output, which leads to more optimism, and so on. This is the accelerator effect. · Another factor in a firm's investment and employment decisions is the amount of excess labor and excess capital it has on hand. Obviously, the more it has, the less likely it is to invest in new capital and hire new workers.
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Unformatted text preview: What's less obvious is why a firm would want to hold excess labor and capital. · Suppose there's an economic downturn and a firm needs to cut back production. Laying off workers or selling some capital could involve large adjustment costs, such as hurting worker morale. A firm may be better off having more inputs than necessary to avoid these costs. · One final concept we can discuss is Okun's Law, which says the unemployment rate falls by about one percent for every 3 percent increase in real GDP. Although the relationship is not exactly one to three, it's true a one percent increase in output leads to less than a one percent decrease in the unemployment rate. · Why? Well, firms increase the number of hours their current workers work. Output increases without a drop in unemployment. When output goes up, workers who were discouraged start looking for work again. The labor force increases, which puts upward pressure on the unemployment rate, even though output is increasing....
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