Total output is divided between the payments to

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Unformatted text preview: rewritten as: (Y – T – C) + (T – G) = I, where (Y – T – C) is disposable income minus consumption, private saving, and (T – G) is government revenue minus government spending, public saving. Saving is the supply of loanable funds, while investment is the demand for loanable funds. S = I(r). The interest rate adjusts until the amount that firms want to invest equals the amount that households want to save. Increase in government spending: Since total output is fixed by the factors of production, if there is an increase in government spending (G), it must be met by an equal increase in investment since consumption does not depend on G and Y = C + G + I. Hence, the increase in government purchases causes the interest rate to increase and investment to decrease. Government purchases are said to crowd out investment. The interest rate rises since the government has not increased taxes but increased spending, which means that public saving, and therefore national saving, decreases. The decrease in saving shifts the savings function left, resulting in higher interest rates and less investment. Decrease in taxes: the tax cut raises disposable income T, which raises consumption. Since G is fixed by government and output is fixed by the factors of production, and Y = C + G + I, the increased consumption causes a decrease in investment. For investment to fall, interest rates must rise, and an decrease in taxes crowds out investment and raises the interest rate. Investment demand: technological innovation can increase demand for investment. Government can influence investment through tax laws, such Page 6 of 52 Jessica Gahtan Prof: Mokhles Hossain Macroeconomics ECON2000 Fall 2013 as providing tax cuts for those who invest in new capital. An increase in desired investment raises the interest rate whether the savings curve is vertical or positively sloping. Assumptions of chapter 3 to keep in mind: ignored the role of money, ignored international trade, the labour force is fully employed, capital stock/labour/technology are fixed, ignored short- run sticky prices. Keep these in mind when reading on. Chapter 4 Inflation: the overall increases in prices. Extraordinarily high inflation is called hyperinflation. Money is the stock of liquid financial assets than can be readily...
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This test prep was uploaded on 03/28/2014 for the course ECON 2000 taught by Professor Henriques during the Fall '10 term at York University.

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