ECON 1202 1st Edition Lecture 18 Outline of Last Lecture I. Aggregate Expenditure ModelII. Determining the Level of Aggregate Expenditure in the EconomyOutline of Current Lecture I. Planned InvestmentII. Government PurchasesIII. Net ExportsIV. Graphing Macroeconomic EquilibriumCurrent LectureI. Planned Investmenta. Investment has increased over time, but unlike consumption, it has not increasedsmoothly, and recession decrease investment more. b. What affects the level of investment?i. Expectations of Future Profitability1. Investment goods, such as factories, office buildings, machinery, etc. are long lived. Firms build more of them when they are optimistic about future profitability. ii. Interest Rates1. Since business investment is sometimes financed by borrowing, the real interest rate is an important consideration for investingiii. TaxesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.1. Higher corporate income taxes on profits decrease the money available for reinvestment, and decrease incentives to invest by diminishing the expected profitability of investment. iv. Cash flow1. Firms often pay for investments out of their own cash flow, the difference between the cash revenues received by a firm and the case spending by the firm. 2. The largest contributor to cash flow is profit. II. Government Purchasesa. Real government purchases include purchases at all levels of government: federal, state and local. b. This category does not include transfer payments, only purchases for which the government receives some good or service.c. Government purchases have generally, but not consistently, increase over timeIII. Net Exports a. Net Exports equals exports minus importsb. The value of net exports is affected by:i. Price level in U.S. vs. the price level in other countries1. If U.S. price level rises faster than foreign price levels, US net exports will decrease because US goods become more expensive relative to foreign goods; so imports rise and exports fall. ii. U.S. growth rate vs. growth rate of other countries1. If U.S. GDP grows faster than foreign GDP, then U.S. net exports will decrease because U.S demand for imports rises faster than foreign demand for our exports. iii. U.S. dollar exchange rate1. If U.S. Dollar increases in value relative to other currencies, U.S. net exports will decrease because imports are cheaper and out exports are more expensive.a. $1 = 4 eurosb. $20,000 = 80,000 euros c. $1 = 5 eurosd. $20,000 = 100,000 euros i. Value of the dollar has gone upii. Value of Euro has gone down because they must give up 5 euros instead of 4 eurosc. U.S. net exports have been negative for the last few decades. The value typically becomes higher (less negative) during a recession, as spending on imports fall.IV. Graphing Macroeconomic Equilibriuma. The 45 Degree line diagram or Keynesian Crossi. We can apply this model to a real economy, with real national income on the x-axis, and real aggregate expenditure on the y- axis. ii. Any point on the 45-degree line could be an equilibrium; but how do we know which one will be the equilibrium in a given year?1. To determine this, recall that when they receive additional incomehouseholds consume some of it and save some of