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
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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.
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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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