ECON 1P92 Lecture Notes - Lecture 6: Kraft Dinner, Real Interest Rate, Retained Earnings

• School: Brock University
• Department: Economics
• Course: ECON 1P92
• Professor: Indra Hardeen

Document Summary

Econ 1p92 - lecture 6 notes: ch 21: the simplest short-run macro model. Interest rates change: many durable goods bought on credit (cars ) Expectations about future economy affect spending(expect good times) Does not change automatically with national income. The 3 main determinations of i: real interest rate. Opportunity cost of using money (borrowing or retained earnings) for investment. A rise interest rate: opportunity cost of nolairig inventory increase. Invest in paint + equipment costs rise: desired (i) falls, change in inventories (sales) Higher levels of production + sales leads to larger desired inventories. Changes in production and sales cause changes in investment (or dis-investment) in inventories: business confidence. If business confidence is high, firm invest now to earn future profits. Business confidence may rise and fall together (i) is autonomous (does not change with y) Level of desired (ae) at each level of actual national income (y) Slope of ae > marginal propensity to spend (mpspend)