What do we mean by “business investment (I)”?Investment is the change in capital stockA nation can accelerate economic growth by increasing the capital stockPPF shifts outward with investmentIncludes spending on office buildings, factories, machines, delivery trucks, software, R & D, inventories, etc.Investment is what percent of total spending on RGDP? Is it important?17%Yes because of PPF: when we increase the capital stock this accelerates economic growth and increases a nation’s future standard of living.Profits = Revenues - Costs.What does a firm compare when making a decision to invest or not invest?Expected Real Return on I is greater than or equal to interest costHow would a change in business expectations of future profitability (EFP), the real interest rate (r), technological change, and business taxes (t) affect new I expenditures?ECON 104 1st EditionFinal Exam Study Guide Chapters: 12 - 16These review questions are taken from your notes and from any readings I have assigned that are not covered in class. The final is not cumulative. The exam will be on material starting with Investment Demand, packet pages 108 through 183, from chapters 12, 13, 14, 15 and 16.Chapter 12, packet pages 108 - 119  What do we mean by “business investment (I)”?  Investment is the change in capital stock  A nation can accelerate economic growth by increasing the capital stock- PPF shifts outward with investment  Includes spending on office buildings, factories, machines, delivery trucks, software, R &D, inventories, etc.  Investment is what percent of total spending on RGDP? Is it important?  17% Yes because of PPF: when we increase the capital stock this accelerates economic growth and increases a nation’s future standard of living. Profits = Revenues - Costs. What does a firm compare when making a decision to invest or not invest?  Expected Real Return on I is greater than or equal to interest cost  How would a change in business expectations of future profitability (EFP), the real interest rate (r), technological change, and business taxes (t) affect new I expenditures? Investment demand is a function of: Expected Future Profitability (EFP) - Positively related Real interest rate- Negatively related Move along the curve (NOT A SHIFT) Business taxes- Negatively related Technological change- Positively relatedThese 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. Draw the investment (I) demand curve. What economic variable is on the vertical axis? Is the slope of this curve positive or negative? Why? The investment demand curve (I) has a negative slope because real interest rate is on the Y Axis and investment increases as interest rates decrease If firms decide to increase Investment, how does this affect the economy as a whole?  This will shift AD to the right  Define Net Exports (NX). NX= Exports (X) – Imports (M) NX is a function of  Relative growth in price levels Relative growth in RGDP Relative value of the $ versus other currencies How do relative inflation rates (U.S. versus the rest of the world), the relative growth of real GDP (U.S. versus trading partners), and the value of the dollar (versus foreign currencies of trading partners) affect NX? Relative Inflation Rates  Negatively correlated Relative RGDP Negatively correlated Value of the Dollar Negatively correlated During recession, NX tend to rise. Why? During Recession in the US, NX usually increases because ceteris paribus US inflation < ROW inflation US % change RGDP < ROW % Change RGDP $ weakens  Suppose the exchange rate is defined as: E¥/$. If E falls does the dollar strengthen or weaken? Appreciate or depreciate? How does this affect NX? The dollar weakens  The dollar depreciates  NX will increase because Yen goes further now! When government expenditures increase, AD increase.  Chapter 13, packet pages 121 - 152 Define aggregate demand (AD). What are the components of AD?  AD = C + I + G +NX AD is the level of real GDP purchased by households (C), businesses (I), government (G), and foreigners (NX) What are the 3 reasons why AD has a negative slope when we graph it against the price level?  The Wealth Effect Wealth = Assets – Liabilities As the price level rises: real value of wealth falls - Consumption falls  The interest Rate Effect  As the Price level rises, we need more money to buy goods and services - Households hold more cash and borrow more  The increase in demand for loans increases the real interest rate on loans  C and I spending decrease  The NX Effect  As the price level rises faster in the US compared to the ROW- NX goes down What factors would cause AD to shift? (See class handout replacing packet p. 124.) A Change In: Consumption - Wealth  positive- Taxes  Negative - Expected Household Income  Positive - Real Interest Rate  negative- Disposable Income  positive Investment - Estimated Future Production  positive- Technology  positive- Business Taxes  negative- Real interest rate  Negative Net Exports - Relative Growth in RGDP negative- Value of the $ versus other currencies  Negative Government Expenditures - Positive  Define long-run aggregate supply (LRAS). Why do we say LRAS represents potential GDP or full employment output.  Identifies output at potential where Y = Y Bar and U = U bar  Potential Output is determined by the:- Number of workers - Capital stock - Available technology  LRAS is vertical changes in the price level and do not affect the level of real GDP in the long run Y? What is the level of unemployment at full employment?  Answer: U How would an increase in the size of the US work force, an increase in the U.S. capital stock or an advance in technology affect the U.S. economy?  Shift rightward  Define short-run aggregate supply (SRAS). Why does the SRAS have a positive slope? Suppose output prices rise by 10% while input prices remain fixed, what is the %Δprofits? Will a firm have an incentive to increase production? SRAS shows the relationship in the Short Run between the price level and the quantity of real GDP supplied by firms  SRAS has a positive