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ECN 204
Amy Peng

Shifts in the Invest Demand CurveAcquisition Maintenance and Operating CostsBusiness TaxesTechnological ChangeStock of Capital Goods on HandExpectations Fluctuations of InvestmentDurabilityIrregularity of InnovationVariability of ProfitsVariability of Expectations Summary Equilibrium GDPThe equilibrium output is that out put which creates total spending just sufficient to produce that outputOther features of equilibrium GDPSaving equals planned investmentsaving represents a leakage of spendinginvestment can be thought of as an injection of spendingNo unplanned changes in inventoriesThrough a multiplier effect an initial change in investment spending can cause a magnified change in domestic outputMultiplierthe ratio of a change in the equilibrium GDP to the change in investment Changes in GDPmultiplier x initial change in spendingThe initial change in spending associated with investment spending because of investments volatility associated with investment spending results from either a change in the real interest rate or a shift of the ID curve 1may create a multiple increase in GDP and a decrease in spending may be multiplied into a large decrease in GDP Rationalespending generates incomechange in income will cause both consumption and saving to changeThe larger the MPC and the smaller the MPS the greater the size of the multiplierSummary Basic Keynesian ModelAssumption price is fixed in the short runAggregate expenditure is the planned total spending on final goods and servicesAECI no government no tradeThe equilibrium output is that out put which creates total spending just sufficient to produce that output YAESaving equals planned investment SINo unplanned changes in inventories Suppose that France has an MPC Marginal Propensity To Consume of 022 and a real GDP Gross Domestic Product of 431 billion Also suppose that its investment spending decreases by 9 billionCalculate correct to 1 decimal place Frances new level of real GDP in the aggregate expenditures modelRecall YCI1c e0g Y 910221154 billion e New GDPOld GDPchange in GDP 431115441946 billionAdding the Government SectorSimplifying Assumptionsgovernment purchases do not cause any shift in consumption or investment schedulesnet tax revenues are derived totally from personal taxestaxes do not vary with GDPGovernment spending G is autonomous expenditureTaxes affect disposable incomeIncreases in public spending shift the AE schedule upward and result in higher equilibrium GDPExamples suppose government add 40 billion of purchases suppose government impose 40 billion of lumpsum tax The Transmission Mechanism 1 With prices constant changes in money supply change nominal and real interest rates 2 Changes in real interest rates change consumption expenditure 3 Change in real interest rate also cause changes in planned investment expenditure 4 Changes in nominal interest rate also cause changes in exchange rates which change the price competitiveness and profitability of trade2
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