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Chapter 8 Review.docx

4 Pages

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ECN 204
Thomas Barbiero

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Chapter 8 Review Summary 8.1 – The income-consumption and income-saving relationships  Other things equal, a direct (positive) relationship exists between income and consumption and income and saving. o The consumption and saving schedules show the various amounts that households intend to consume and save at the various income and output levels, assuming a fixed price level.  The average propensities to consume and save show the fractions of any total income that are consumed and saved: APC + APS = 1  The marginal propensities to consume and save show the fractions of any change in total income that is consumed and saved: MPC + MPS = 1  The locations of the consumption and saving schedules (as they relate to real GDP) are determined by:  (a) The amount of wealth owned by households  (b) Expectations of future income, future prices, and product availability  (c) The relative size of household debt  (d) Taxation o The consumption and saving schedules are relatively stable. 8.2 – The interest rate-investment relationship  The immediate determinants of investment are:  (a) The expected rate of return  (b) The real interest rate o The economy’s investment demand curve is found by:  Cumulating investment projects  Arraying them in descending order according to their expected rates of return  Graphing the result  Applying the rule that investment will be profitable up to the point at which the real interest rate, i, equals the expected rate of return, r.  The investment demand curve reveals an inverse relationship between the interest rate and the level of aggregated investment. 8.3 – Shifts in the investment demand curve  Shifts in the investment demand curve can occur as the results of changes in:  (a) The acquisition, maintenance, and operating costs of capital goods  (b) Business taxes  (c) Technology  (d) The stocks of capital goods on hand  (e) Expectations  Either changes in interest rates or shifts in the investment demand curve can shift the investment schedule.  The durability of capital goods, the variability of expectations, and the irregular occurrence of major innovations all contribute to the high fluctuations in investment spending. 8.4 – The multiplier effect  Through the multiplier effect an increase in:  Investment spending  Consumption spending  Government purchases  Net export o Ripples through the economy, ultimately creating a magnified increase in real GDP.  The multiplier is the ultimate change in GDP divided by the initiating change in investment or some other component of spending.  The multipli
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