Econ 204 1st Edition Lecture 8Outline of Last Lecture Income and ExpendituresOutline of Current LectureInvestmentPlanned investment SpendingInventoriesCurrent LectureInvestment A. Planned Investment SpendingPlanned investment spending is the investment spending that businesses plan to undertake during a given period. Planned investment spending depends negatively on interest rates and existing production capacity (Maximum level of output)Planned investment spending depends positively on expected future real GDP. Expected future sales have a positive effect on investment spending and the current level of productive capacity has a negative effect on investment spending. Therefore, firms will be more likely to undertake high levels of investment if they expect sales to increase quickly. This growth of sales will take up excess capacity and encourage investment. B. Inventory InvestmentInventories: stocks of goods held to satisfy future salesInventory investment: the value of the change in total inventories held in the economy during a given periodUnplanned inventory investment: occurs when actual sales are more or less than businesses expect, leading to unplanned changes in inventories.Actual investment spending is the sum of planned investment spending and unplanned inventory investment. C. Important Conclusions1. An autonomous change in aggregate spending leads to a chain reaction in which the total change in real GDP is equal to the multiplier times the initial change in aggregate spending. 2. The size of the multiplier, 1/(1-MPC) depends on the marginal propensity to consume (MPC). MPC = the fraction of an additional dollar of disposable income spent on consumption.3. The consumption function shows how an individual household’s consumer spending is determined by its current disposable income. 4. The aggregate consumption function shows the relationship for the entire economy. These 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.5. Planned investment spending depends negatively on the interest rate and on existing production capacity, and depends positively on expected future real GDP.6. Firms hold inventories of goods so that they can satisfy consumer demand quickly.7. Inventory investment is positive when firms add to their inventories, negative when they reduce them.8. Unplanned inventory investment occurs because actual sales are higher or lower than expected. 9. Actual investment spending is the sum of planned investment spending and unplanned inventory