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EC 102 Review Midterm.docx

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CAS EC 102

EC 102 Review Midterm #2 - Consumption demand o Determinants of consumption spending o Marginal propensity to consume - Investment o What is it, why is it important o Gross vs. net investment - Net exports o Determinants of exports, imports, net exports - Balance of payments o Current account o Financial account - The fundamental macro equation GDP=Aggregateexpenditure o Y=C+I+G+NX o - Determinants of consumption o Current disposable income  Total cuurent income after taxes are taken out and after transfer payments are added • ¿Y D Y−Taxes+Transfer Payments • o Marginal prospensirt to consume change∈consumption  MPC = change∈disposableincome o Expected future disposable income (Y−T+TR) e  De • Y increases, consumption goes up o Real interest rate  = r  When r goes up, consumption goes down • Incentive to save • More to borrow o Household wealth  Wealth increase, spending increases o Price level  Price level goes up, wealth goes down - investment o plant and equipment o housing o inventories o determinants of investment  the real interest rate • investment spending goes down when real interest rate increases o cost more to borrow to invest  PDV • NPV o When interest rate go up, fee and few projects have a positive NPV  Investment fall s o Financing alternatives  Retained profits  Bank loans  Bonds • PDV • Coupon payments = face value x coupon rate  use PDV of coupon payments and initial payment  Stocks  Primary and secondary markets  Indirect and direct finance o Investment determinants  Current level of Y  Expected future of Y, Ye  Tax po
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