Investment. Investment demand curve.
Determinants:
· Expected rate of return: businesses buy capital goods only when they expect such purchases to be profitable
· The real interest rate: the financial cost of borrowing the money capital required to purchase the real capital
The curve is downsloping, reflecting an inverse relationship between the real interest rate and quantity of investment demanded.
Equilibrium GDP: Expenditures – Output approach. ?
Multiplier effect of Investment.
The change in investment leads to a larger change in output and income.The ratio of a change in equilibrium GDP to the inital change in investment spending .Mi=GDP/i or Mi=1/(1-MPC)=1/MPC
26. Equilibrium GDP: Leakage – Injections.A part of Dl may be saved not consumed by households. Saving represents a leakage of spending from income – expenditures stream. Saving is what keeps consumption short of total output or GDP. Investment – a potential replacement for leak stage of saving. Equilibrium GDP- at the point where the amount households save and the amount businesses plan to invest is equal.
Recessionary Gap.
the level of equilibrium GDP is less than full-employment GDP. This is amount by which aggregate expenditures at the full-employment GDP fall short of those required to achieve the full-employment GDP.
This lack of spending contracts or depresses the economy.
Q(e) – equilibrium GDP
Q(p) – potential GDP
Inflationary Gap.
is the amount by which an economy` s aggregate expenditures exceed those just necessary to achieve the full employment GDP. This effect will pull output prices. Nominal GDP will rise because of a higher price level, but real GDP will not.
Fiscal Policy: meaning, tools, goals.
Fiscal policy- is the means by which a government adjusts its levels of spending in order to monitor and influence a nation` s economy.
Tools: 1) Government spending
2) Government taxing. They are directly related to the economy` s total output, income and employment levels.
Goals : 1) increase government spending- Increasing G pushes the economy out of recession. Real GDP rises;
2) Reduce taxes- AE=C+I;
C is determined by Dl.
To increase initial consumption by specific amount, government must reduce taxes by more, than that amount.
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Tax reduction :
C1=Co+MPC
C2=Co+MPC
BUT Fiscal policy during recession or depression should create a government budget deficit – government spending in excess of tax revenues.
3) Use some combination of the two.
Multiplier effect of Taxation. Multiplier effect of Government Purchases. ?
31. Discretionary Fiscal Policy.Means that the changes in taxes and government spending are at the opinion of the Federal government.
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