FIN 34220 Lecture Notes - Lecture 8: Aggregate Demand
Document Summary
Actual level of consumption is actually dependent on a savings decision. = fraction of disposable income that people decide to spend on consumption. Single most important factor in determining the level of consumption is disposable income. Investment independently of anything else can go up and go down. When you spend money today on a purchase of capital equipment, there"s a current cost attached to obtaining the funds and on those funds you"ll pay interest. The higher the interest rate, the lower the investments taken. Interest rate = general cost of borrowing in the economy. If businesses become more confident about the future, they"ll spend more on investments, so it"ll go up. So can go up or down according to business confidence. Real dollars r is a percentage, so e must be measured in real dollars also. So all of these equations are measured in real dollars.
