Econ 104 1st Edition Lecture 17Outline of Last Lecture I. Factors that Affect the C function II. Example Graphs Outline of Current Lecture II. Marginal Propensity to saveIII. Aggregate ExpenditureIV. Factors of Investment Current LectureI. The Marginal Propensity to Save: MPS = Change in S / Change in Yda. If you know the MPC you can solve for the MPS i. MPC = Marginal Propensity to Consume ii. ∆Yd = ∆C + ∆Siii. 1 = (∆C/∆Yd) + (∆S/∆Yd)iv. 1 = MPC + MPSi. Aggregate Expenditure (AE)a. AE = C + I + G + NX = ADb. Investment Expenditures (I)i. Approximately 17% of RGDPii. Includes Spending by firms on:1. Office buildings, factories, machines, delivery trucks, software, etc. (capital goods)2. Inventories3. Research and Development ( R & D)ii. Investment = ∆ Capital Stock a. Recall: i. A nation can accelerate economic growth by increasing the capital stock = investment PPF shifts outwardii. Investment expenditures increase the nation’s future standard of livingiii. Investment over the Great Recession fell dramaticallyiv. Investment is more volatile than Consumption v. Investment Demand Graph 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.i. Factors that affect the I function a. Move along the I demand curvei. ∆Real interest rate: r 1. A firm will undertake if:a. Expected real return on I is greater than or equal to the Interest Cost b. EX: Home depot wants to open 5 new stores in PAi. Expected return of I is 12% and cost of borrowing is8%.1. They will do it because profitability is higherthan interest costb. Shift the I demand i. ∆ Expectations of future profitability 1. Reflects firms’ confidence I the futurea. Optimistic: I demand shifts rightb. Pessimistic: I demand Shifts Left2. Keynes: I is driven by “animal spirits”a. Animal spirits reflect business confidenceii. ∆Technological Changeiii. ∆Business
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