An upward shift of the consumption schedule entails a downward shift of the

An upward shift of the consumption schedule entails a

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An upward shift of the consumption schedule entails a downward shift of the saving schedule If households consume more at each level of real GDP, they are saving less A downward shift of the consumption schedule is reflected in an upward shift of the saving schedule If households consume less at each level of real GDP, they are saving more The Interest Rate-Investment Relationship Expected rate of return, r The real interest rate i = nominal rate - rate of inflation Crucial in making investment decisions Downloaded by Ryan L. ([email protected]) lOMoARcPSD|4821790
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26 The investment demand curve Constructed by arraying all potential investment projects in descending order of their expected rates of return Curve slopes downward, reflecting an inverse relationship between the real interest rate and the quantity of investment demanded Shifts in the Investment Demand Curve Acquisition, maintenance, and operating costs Business taxes Technological change Stock of capital goods on hand Planned inventory Expectations Fluctuations of investment Variability of expectations Durability Irregularity of innovation Variability of profits Downloaded by Ryan L. ([email protected]) lOMoARcPSD|4821790
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27 Increases in the investment demand are shown as rightward shifts of the investment demand curve Decreases in investment demand are shown as leftward shifts of the investment demand curve The Multiplier Effect A change in spending changes real GDP more than the initial change in spending Changes in spending ripple through the economy to generate even larger changes in real GDP - this is called the multiplier effect Downloaded by Ryan L. ([email protected]) lOMoARcPSD|4821790
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28 The multiplier and marginal propensities Multiplier and MPC directly related Large MPC results in larger increases in spending Multiplier and MPS inversely related Large MPS results in smaller increases in spending Building the Aggregate Expenditures Model Consumption and Saving Assumptions and simplifications Use the Keynesian aggregate expenditures model Prices are fixed GDP = DI Begin with private, closed economy - one without international trade or government Consumption spending Investment spending The investment demand curve and the investment schedule The level of investment spending is determined by the real interest rate together with the investment demand curve ID The investment schedule Ig relates the amount of investment to the various levels of GDP Downloaded by Ryan L. ([email protected]) lOMoARcPSD|4821790
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29 Equilibrium GDP Equilibrium GDP in a private closed economy Aggregate expenditures schedule, C + Ig, is determined by adding the investment schedule, Ig, to the upsloping consumption schedule, C Equilibrium GDP is determined where the aggregate expenditures schedule intersects the 45 degree line (in this case at $470 billion) Other features of equilibrium GDP Saving equals planned investment Saving represents a leakage of spending
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