ECON 205 2nd Edition Lecture 8 Outline of Last Lecture I Savings the savings function and investment II Consumption and the consumption function III Marginal propensity IV Economic cycles Outline of Current Lecture I The business cycle revisited II Macroeconomic Equilibrium III Multiplier Model IV Change in investment V Monopolies Current Lecture I The business cycle revisited The economy does not grow smoothly over time it grows in gyrations Economists have tried to smooth out such gyrations to remove uncertainty and risk for consumers and businesses Business cycle causes can be exuberance vs pessimism fluctuation in national output employment and unemployment percentages profits changes in real income inflation and changes in interest rates The duration is between two and ten years and covers the entire economy II Macroeconomic Equilibrium Macroeconomic Equilibrium is when different forces at work are in balance there is no further tendency for change all variables are satisfied At equilibrium level of output spending and output are in balance Deficit financing spending out of debt creates assets and values like universities Countries with high debt tend to have high per capita incomes third world countries with low debt tended to have low per capita incomes III Multiplier Model The multiplier effect is when the change in investment is equal to change in GDP times the multiplier M The change in GDP equals the reciprocal of marginal propensity to save multiplied by change in investment This is equivalent to 1 1 marginal propensity to consume multiplied by change in GDP Fiscal policy in the multiplier model government spending increases growth while government taxation will contract and slow the economy It can influence in the business cycle IV Change in investment The change in income is equal to the reciprocal of the marginal propensity to save multiplied by change in investment 1 income investment MPS Aggregate demand in the economy determines unemployment Keynes determined that aggregate demand is dependent on consumption investment government expenditures and net export the GDP Keynes figured out that people have a preference for current consumption rather than future consumption investment They receive more satisfaction for current consumption the foundation of consumer economics Investment is related to the current interest rate and the marginal efficiency of capital the expectation of profit V Monopoly Monopolies lead to inefficient distributions of resources as they have no reason to improve efficiency for competition In the United States the Federal Trade Commission regulates monopolies with anti trust laws
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