Investment Demand Curve Overview

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Questions and Answers

What does the Investment Demand Curve illustrate?

The relationship between Capacity utilization and Investment

The relationship between Government policy and Investment

The relationship between Investment and Interest Rates (correct)

The relationship between Investment and National Income

Which factor would most likely cause a downward shift in the Gross Business Investment Expenditures (Ig) curve?

Increase in expected rate of profit from business investment

Technological advancement

Decrease in business confidence (correct)

Increase in rate of capacity utilization

How does an increase in government policy influence the Gross Business Investment Expenditures (Ig) curve?

It causes the curve to shift downward (correct)

It has no effect on the curve

It only shifts the curve at certain interest rates

It always shifts the curve upward

Which of the following factors is NOT a positive shift event for the investment curve?

Increased business regulation Signup and view all the answers

What is the effect of a decrease in a positive shift event on the investment curves?

It shifts the curves to the left Signup and view all the answers

What does the variable C0 represent in the consumption equation?

Households' autonomous consumption Signup and view all the answers

In the consumption equation C = C0 + mpc(YD), what does the variable mpc signify?

Marginal propensity to consume Signup and view all the answers

According to the content, how does a change in disposable income affect the consumption curve?

It moves the economy along the existing consumption curve Signup and view all the answers

If the slope of the consumption curve is given as mpc = 0.62, what does this indicate about consumer behavior?

An increase in disposable income increases consumption by 62 cents for every additional dollar Signup and view all the answers

Which of the following factors does NOT directly affect consumption expenditures?

Inflation rates in the economy Signup and view all the answers

What does the term 'autonomous consumption' refer to?

Spending that occurs regardless of current disposable income Signup and view all the answers

What would be the total consumption if households have a disposable income (YD) of $1,000 and C0 equals 668 with mpc equal to 0.62?

$1,290 Signup and view all the answers

Which of the following describes the relationship between disposable income and consumption expenditures?

They are positively related Signup and view all the answers

What is the first step in calculating Equilibrium Output using the model?

Substitute the equations of C and I into AE = C + I Signup and view all the answers

What is the formula for personal saving (S) based on disposable income (YD) and consumption (C)?

S = YD - C Signup and view all the answers

In the formula for Equilibrium Output (Ye), what does 'z' represent?

The marginal propensity to consume (mpc) Signup and view all the answers

If Y = 3,500 and the calculated AE is 3,316, what is the unplanned inventory change (UIC)?

184 Signup and view all the answers

Which factor would shift the consumption curve to the right?

Increased household wealth Signup and view all the answers

If C = 668 + 0.62YD, what is the marginal propensity to consume (mpc)?

0.62 Signup and view all the answers

What does the equation AE = A0 + zY signify in the model?

Aggregate Expenditure is a function of income and autonomous expenditure Signup and view all the answers

What is the value of the marginal propensity to save (mps) when mpc = 0.62?

0.38 Signup and view all the answers

Using the Ye formula, how can A0 be calculated?

By taking the sum of consumption and investment Signup and view all the answers

What is the intercept (C0) in the consumption equation C = 668 + 0.62YD?

668 Signup and view all the answers

In the graph representing macroeconomic equilibrium, which of the following indicates the equilibrium output?

Where AE intersects the 45-degree line Signup and view all the answers

When disposable income (YD) increases, which of the following is expected regarding savings (S)?

Savings will increase. Signup and view all the answers

What occurs when the economy is not in equilibrium and Y > Ye?

There is an accumulation of unplanned inventory Signup and view all the answers

In the context of the provided model, what is the value of I given in the examples?

478 Signup and view all the answers

What does a negative value of S0 indicate in the private-sector saving equation?

Households are dis-saving. Signup and view all the answers

If household debt increases, how is the consumption curve likely to shift?

Shifts to the left Signup and view all the answers

What does it indicate when Unplanned Inventory Change (UIC) equals zero?

Aggregate Expenditures (AE) equal Real GDP (Y). Signup and view all the answers

What is the relationship between Total Injections and Total Leakage for equilibrium?

Total Injections equal Total Leakage. Signup and view all the answers

In the context of the model, how is equilibrium expressed?

Y = AE and UIC = 0. Signup and view all the answers

According to the assumption stated, how does Nominal GDP relate to Real GDP?

Nominal GDP is equal to Real GDP. Signup and view all the answers

Which of the following statements about Aggregate Expenditures (AE) is correct?

Businesses adjust supply based on changes in AE. Signup and view all the answers

What can be inferred if the economy is not in equilibrium?

There is either a surplus or a shortage of unsold products. Signup and view all the answers

Which method is NOT mentioned as a way to determine the Equilibrium Output (Ye)?

Analyze historical trends. Signup and view all the answers

Which concept directly implies that businesses will supply any output demanded by the public?

Demand-determined output. Signup and view all the answers

What does the term A0 represent in the Aggregate Expenditures (AE) equation?

Autonomous expenditures Signup and view all the answers

How does an increase in A0 affect the AE curve?

It shifts the AE curve up. Signup and view all the answers

What does the variable z signify in the AE equation?

The fraction of each income dollar spent Signup and view all the answers

What effect does a decrease in z have on the AE curve?

It rotates the AE curve down. Signup and view all the answers

What is the primary assumption made in the AE model described?

The General Price Level is fixed. Signup and view all the answers

Which of the following is true regarding the relationship between consumption and aggregate expenditures?

AE includes both consumption and investment. Signup and view all the answers

In the consumption equation, what does YD stand for?

Disposable income Signup and view all the answers

What happens to the AE curve when there is a decrease in A0?

The AE curve shifts down. Signup and view all the answers

Which equation represents the relationship of the consumption curve?

C = C0 + mpc(Y) Signup and view all the answers

What does a higher value of the slope z indicate in the AE curve?

Higher marginal propensity to consume Signup and view all the answers

Study Notes

Macroeconomic Models

Macroeconomics models the national economy based on the Keynesian view. Aggregate demand determines output and employment.
Chapters 6 & 7 model the economy without government involvement.
Components of aggregate expenditures are studied.
Equilibrium rate of output is examined.
Economic adjustments towards equilibrium are explored.
Methods used to raise equilibrium output are also discussed

Definitions Based on Chapter 5

Average Propensity to Consume (APC) is the fraction of disposable income spent. APC = C/YD
Average Propensity to Save (APS) is the fraction of disposable income saved. APS = S/YD
APC + APS =1
Marginal Propensity to Consume (MPC) is the fraction of the additional dollar of disposable income spent. MPC=ΔC/ΔYD
Marginal Propensity to Save (MPS) is the fraction of the additional dollar of disposable income saved. MPS=ΔS/ΔYD
MPC + MPS = 1

Examples

Example calculations of APC and APS using disposable income and consumption data from different years.
Example showing how a change in disposable income affects the level of consumption. Calculation of MPC and MPs from the example
Calculations for computing the Break-Even Disposable Income from the provided consumption equation.

Simple Short-Run Macroeconomic Model

Aggregate Expenditure (AE) is the amount buyers spend on the nation's output.
In the short-run, producers base production decisions on anticipated AE.
Equilibrium output (Y) equals AE.
Components of AE are explored (Consumption and Investment).
Closed economy means no foreign sector: No exports or imports (X; IM), No government sector (G;, Taxes); AE = C + I

Consumption Expenditures (C)

Factors influencing personal consumption expenditure include: disposable income, wealth, consumer confidence, real interest rates, and household debt. A positive correlation exists between consumption and disposable income.
The consumption equation is C = Co + mpc(YD) where Co is autonomous consumption and mpc is the marginal propensity to consume.

Investment Expenditures (I)

Factors that determine investment expenditures include interest rates, expected rate of profit from business investment, government policy (e.g., business taxes, industry regulation), technological change, rate of capacity utilization, and expectations (e.g., business confidence).
Investment expenditures are inversely related to interest rates.

Aggregate Expenditure Function (AE)

Aggregate expenditures (AE) depend on national income, the function for AE is expressed as AE = A0+ zY
Autonomous expenditures (A0) is the part of aggregate expenditures spent on all households' wealth, excluding this year’s income.
Income-induced expenditures (zY) are the expenditures made from this year’s income, and z is the marginal propensity to spend.
The slope of the AE curve is equal to z (marginal propensity to spend).
An increase in A0 shifts the AE curve up, while a change in z rotates the curve.

Macroeconomic Equilibrium

Equilibrium occurs when aggregate expenditures (AE) equal real GDP (Y).
Unplanned inventory change (UIC) = 0 in equilibrium.
Total injections in an economy equal total leakages(S).

Ways to determine Equilibrium Output (Ye)

Solve a model.
Use a formula.
Read from a table.

Factors that change Equilibrium Output

Changes in the marginal propensity to spend (z).
Changes in autonomous expenditures (A0).

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Description

This quiz explores the fundamental concepts related to the Investment Demand Curve and its influencing factors. It delves into how various elements can shift the Gross Business Investment Expenditures curve and the implications of government policies. Test your understanding of these economic principles!