Economics- Chapter 9
Terms
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- What is the formula for APC?
- Average propensity to consume (APC) = consumption/income
- What is the formula for APS?
- Average propensity to save (APS) = saving/income
- What is the formula for MPC?
- Marginal propensity to consume (MPC) = change in consumption/change in income
- What is the formula for MPS?
- Marginal propensity to save (MPS) = change in saving/change in income
- A schedule showing the amounts households plan to spend for consumer goods at different levels of disposable income.
- Consumption schedule
- A schedule that shows the amounts households plan to save (plan not to send for consumer goods), at different levels of disposable income.
- Saving schedule
- What are the nonincome determinants of consumption and saving?
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1. Wealth (value of both real assets and financial assets
2. Expectations (household expectations about future prices and income)
3. Real Interest Rates
4. Household Debt
5. Taxation - The increase in profit a firm anticipates it will obtain by purchasing capital (or engaging in research and development); expressed as a percentage of the total cost of the investment (or R&D) activity.
- Expected rate of return; r = Expected Profit/Investment
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The interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.
It represents: 1) Cost of borrowed funds; 2) Opportunity cost of investing your own f - Real interest rate
- What is the investment rule?
- A specific investment will be undertaken if the expected rate of return, r, equals or exceeds the real interest rate, i.
- A curve that shows the amounts of investment demanded by an economy at a series of real interest rates. The level of investment depends on the expected rate of return and the real interest rate.
- Investment demand curve (constructed by arraying all potential investment projects in descending order of their expected rates of return)
- The investment demand curve reflects an ______ (_______) relationship between the real interest rate and investment and slopes _______.
- inverse (negative); downward
- The investment demand curve shifts when changes occur in:
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1. The costs of acquiring, operating, and maintaining capital goods
2. Business taxes
3. Technology
4. The stock of capital goods on hand
5. Business expectations - Change in the amount (quantity of investment) is caused by:
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1. Change in the rate of interest
2. Results in movement along the investment demand curve - The effect on equilibrium GDP of a change in aggregate expenditures or aggregate demand (caused by a change in the consumption schedule, investment, government purchases, or net exports).
- Multiplier effect