Investment Decisions of Businesses in An Economy

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ESSAY

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PHD VERIFIED

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APA

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10

Page Count

3-12 PAGES

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Chapter Eleven outline

1. The aggregate expenditures model (with its constant price assumption) is valuable for analysis because in many cases prices are sticky or stuck in the short run. The model can be useful for understanding how economic shocks affect output and employment when prices are fixed or sticky. Two simplifications are made to begin the model construction. First, that the economy is private and closed, which means there is no international trade or government spending. Second, that output or income measure are equal (real GDP= disposable income).

2 The investment decisions of businesses in an economy can be aggregated to form an investment schedule that shows the amounts business firms collectively intend to invest at each possible level of GDP. An assumption is made that investment is independent of disposable income or real GDP.

3. In the aggregate expenditures model, the equilibrium GDP is the real GDP at which aggregate expenditures (consumption plus planned investment) equal real GDP, or C + Ig = GDP. The slope of the curve is equal to the marginal propensity to consume.

4. The investment schedule indicates what investors plan to do. Actual investment consists of both planned and unplanned investment (unplanned changes in inventories). At above equilibrium levels of GDP, saving is great than planned investment, and there will be unintended or unplanned investment through increase in inventories. At below equilibrium levels of GDP, planned investment is greater than saving, and there will be unintended or unplanned disinvestment through a decrease in inventories. Equilibrium is achieved when planned investment equals saving and there are no unplanned changes in inventories.

5. Changes in investment (or consumption) will cause the equilibrium real GDP to change in the same direction by an amount greater than the initial change in investment (or consumption) The reason for this greater change is due to the multiplier effect.

6. In an open economy there are net exports (Xn), which are defined as exports (X) minus imports (M).

a. The equilibrium real GDP in an open economy means real GDP is equal to consumption plus investment plus net exports.

b. The net export schedule will be positive or negative. The schedule is positive when exports are greater than imports; it is negative when imports are greater than exports.

c. Any increase in Xn will increase the equilibrium real GDP with a multiplier effect. A decrease in Xn will do just the opposite.

d. In an open economy model, circumstances and policies abroad can affect the real GDP in the United States.

(1) If there is an increase in real output and incomes in other nations that trade with the United States, then the United States can sell more goods abroad, which increases net exports, and thus increases real GDP. A decline in the real output or incomes of other trading nations has the opposite effect.

(2) High tariffs or strict quotas can have an adverse effect on net exports and thus reduce real GDP. Lower tariffs or eliminating quotas has the opposite effects.

(3) A depreciation in the value of the U.S. dollar will increase the purchasing power of foreign currency which will then increase U.S. exports. The result is an increase in net exports and real GDP. An appreciation in the value of the U.S. dollar has the opposite effect.

7. Changes in government spending and tax rates can affects equilibrium real GDP. Simplified analysis assumes that government purchases do not affect investment or consumption, that taxes are purely personal taxes, and that a fixed amount of tax revenue is collected regardless of the level of GDP.

a. Government purchases of goods and services add to the aggregate expenditures schedule and increase equilibrium real GDP; an increase in these purchases has a multiplier effect on equilibrium real GDP.

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b. Taxes decrease consumption and the aggregate expenditures schedule by the amount of the tax times the MPC. They decrease saving by the amount of the tax times the MPS. An increase in taxes has a negative multiplier effect on the equilibrium real GDP.

8. The equilibrium level of real GDP may turn out to be an equilibrium that is at less than full employment, at full employment or at full employment with inflation.

95-100%

45-41 points

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91-84  points

The context and relevance of the issue, as well as a clear description of the study aim, are presented. The history of searches is discussed.

58-53 points

With titles for each slide as well as bulleted sections to group relevant information as required, the content is well-organized. Excellent use of typeface, color, images, effects, and so on to improve readability and presenting content. The minimum length criterion of 10 slides/pages is reached.

50-85%

More depth/information is required for the context and importance, otherwise the study detail will be unclear. There is no search history information supplied.

There is a review of important theoretical literature, however there is limited integration of research into problem-related ideas. The review is just partly focused and arranged. There is research that both supports and opposes. A summary of the material given is provided. The conclusion may or may not include a biblical integration.

The content is somewhat ordered, but there is no discernible organization. The use of typeface, color, graphics, effects, and so on may sometimes distract from the presenting substance. It is possible that the length criteria will not be reached.

0-45%

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