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Section 16 Notes.doc

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ECON 0110

SECTION 16: GROSS PRIVATE DOMESTIC INVESTMENT AUTONOMOUS INVESTMENT Investment spending that does not depend on the level of GDP. INDUCED INVESTMENT = Investment spending that increases or decreases as GDP increases of decreases THREE CATEGORIES OF INVESTMENT SPENDING PLANT AND EQUIPMENT SPENDING Influenced by state of the economy and by level of interest rates NEW RESIDENTIAL CONSTRUCTION Influenced by level of interest rates CHANGE IN INVENTORIES The desired change in inventories does not necessarily equal the actual change in inventories. The level of inventory cannot be completely determined by a business firm Consumers may buy more or less than the firm expected. DESIRED INVESTMENT SPENDING = the amount business wish to spend on new plant and equipment + the amount contractors wish to spend on new residential construction + the amount that businesses wish to spend to add to their stock of inventory ACTUAL INVESTMENT SPENDING Desired investment will not necessarily equal actual investment spending. Businesses cannot necessarily achieve their desired change in inventories. PLOT INVESTMENT SPENDING VERSUS GDP Plot desired investment spending on the vertical axis. Plot the level of GDP on the horizontal axis. If all desired investment spending is autonomous, the investment function will be horizontal and have a slope of zero. CHANGES IN AUTONOMOUS INVESTMENT Factors that increase the level of autonomous investment spending Increases in Expected Profits Decreases in interest rates Technological change and new products If autonomous investment spending increases, the investment function shifts upward, parallel to itself. INDUCED INVESTMENT SPENDING Investment spending that is induced by increases in the level of G
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