UNIT 3: Interest Rates & Investment Demand

Investment
-Money spent or expenditures on:
     New plants
    Capital equipment (machinery)
    Technology
    New homes
    Inventories (goods sold by producers)

Expected Rates of Return
*How does business investment decisions
-Cost/Benefit Analysis
*How business determine benefits
-Expected rate of return
*How business count the cost
-interest costs
*How business determine the amount of investment they undertake
-compare expected rate of return to interest cost
    If expected return > interest cost, then invest
     If expected return < interest cost, then do not invest

Real (r%) v. Nominal (i%)
Difference
-Nominal is observable rate of interest. Real subtracts out inflation (pi%) and is only ex post facto
How to compute the real IR
*nominal interest rate - inflation rate
r% = i% - ( Π%)
What determines the cost of an investment cost?
-The real iR (r%)
   r% = i% - ( Π%)
Investment Demand Curve (ID)

-Downward Sloping
Why?
-when IR are high, fewer investments are profitable; when iR are low, more investments are profitable
-conversely, there are few investments that yield high rates of return and many that yield low rates of return

Comments

Unit 1 - Business Cycles

Business Cycles --Fluctuation in economic activity that an economy experiences over a period of time -1 cycle from trough to trough -Avrg. Cycle is 5-7 yrs -Recession lasts ~ 14 months -Peaks & Troughs are meaningless b/c we never know we are in one until its over - Trough: end of a recession -if recession loses >10% of real GDP, then it is a depression Expansion - period of high (real) GDP and high employment Peak - highest point just before the unemployment rate rises Contraction - ( Recession ) real GDP decreases in a contraction period ad unemployment rises Trough - our lowest point (often called depression)

UNIT 3: Consumption and Savings

Disposable Income (DI) *Income after taxes or net income DI = Gross income - Taxes 2 Options *w/ DI, households can either -consume (spending money on goods & services) -save (not spend money on goods & services) Consumption *household spending *The ability to consume is constrained by -amount of DI -propensity to save *Do households consume if DI=0 ? -Autonomous consumption -Dissaving APC = C/DI = % DI that is spent Saving *Household NOT spending *The ability to save is constrained by -the amount of DI -prosperity to consume *Households can NOT save if DI=0 APS = S/DI = % DI that is not spent APC & APS *APC + APS = 1 *1- APC = APS *APC >1.:Dissaving *- APS .: Dissaving MPC & MPS *Marginal Propensity to Consume (MPC) --The fraction of any change in DI that is consumed. ΔC/ΔDI -% of every extra dollar earned that is spent *Marginal Propensity to Save (MPS) --The fraction of any change in DI that is saved ΔS/...

Unit 1 - Production Possibilities Graphs (PPG) and Movements

Production Possibilities Graphs (PPG, PPC, or PPF) A.K.A Production Possibilities Curve or Frontier - Each point shows trade-off -Shows alternative ways to use resources - Shows most that society can produce if it uses every available resources to best of ability Point A (Inside the curve) - Attainable, inefficient, underutilization Unemployment, Underemployment, war, famine, natural disasters Recession/Depression Point B [ Curve of the Frontier] (on the curve) attainable & efficient **Utilization of resources efficiently** Point C- (Unattainable -Outside the curve) *Technology *Economic Growth Key Assumptions Full employment (not possible w/ laziness, disabled + retired ) *80-90% factor capacity ...

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