ANNOUNCEMENTS None ERRATA None NOTES BEGIN II CHAPTER 12 AGGREGATE EXPENDITURE

# Announcements none errata none notes begin ii chapter

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ANNOUNCEMENTS:None ERRATA:None NOTES BEGIN: II.CHAPTER 12: AGGREGATE EXPENDITURE (AE) & OUTPUT IN THE SHORT RUN (SR) (CONTINUED)A.The Marginal Propensity to Save: MPS = ΔS/ΔYd1.Recall MPC = slope 2.If you know the MPC, you can solve for the MPS: 3.Yd= C + S ΔY = ΔC + ΔS 1 = MPC + MPS 1 = (0.75) + MPS (Suppose MPC = 0.75) MPS = 0.25 B.Summary: 1.+ - + + - - C = f(Yd, T, Wealth, Ye, P, r) 2.Note: a.+ means that when the variable in the function increases, C increase (e.g., Yd) b.means that when the variable in the function increases, C decreases ( e.g., r) C.Investment Expenditures1.Recall: AE = C + I + G + NX = AD 2.Approximately 17 percent of RGDP 3.Includes spending by firms on: 4.Investment = Capital Stock
2017 NITTANY NOTES ALL RIGHTS RESERVED ANY ATTEMPT TO REPRODUCE THESE NOTES IS PUNISHABLE BY LAWNittany NotesCheck outnittanynotes.com for Online notes!| 814-238-0623 Like us atFacebook.com/NittanyNotes ECON 104.1Exam Pack #3 5 OF 41 LAPOINTE Investment (\$ trillions) r 8% 4% 1 2 3 4 ID1.Graph A 2.Factors that affect the I functiona.Real interest rate: r (move along I demand curve) b.Shift the I demand: 1.Expectations of future profitability 2.Technological change 3.Business Taxes E.Real Interest Rate (r):1.A firm will undertake I if Expected Real Return on I is greater than or equal to Interest Cost a.Example: 1.Suppose Home Depot wants to open several new stores (5) in PA. 2.Expected Return in I for Part 1 is 12% and the Cost of Borrowing is 5%, that makes this Part profitable 3.Expected Return for Part 2 is 12% and the Cost of Borrowing is 15%, this is not profitable 2.As real interest rates rise, less investment projects will be profitable.
2017 NITTANY NOTES ALL RIGHTS RESERVED ANY ATTEMPT TO REPRODUCE THESE NOTES IS PUNISHABLE BY LAWNittany NotesCheck outnittanynotes.com for Online notes!| 814-238-0623 Like us atFacebook.com/NittanyNotes ECON 104.1Exam Pack #3 6 OF 41 LAPOINTE I1DI2D8% 4% 45ABF.Expectations of future profitability (EFP):1.Reflect firms’ confidence in the future a.Optimistic: I demand shifts right b.Pessimistic: I demand shifts left 2.Keynes: I is driven by “animal spirits” a.Animal spirits reflect business confidence 3.Example: Business optimism about the future 4.Graph B G.Technological Change1.New technologies/inventions provide less costly ways of producing output a.“Reducing cost of producing output” 2.Result: Investment demand shifts rightward (See Graph B) 3.Examples: H.Business Taxes (t)1.t is the tax rate on a firms’ revenues 2.I decisions are based upon after-tax profits a.

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