Macroeconomics chapter 10 review

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average propensity to consume


average propensity to save


Marginal propensity to save

MPS=change in saving/change in income

Marginal propensity to consume

MPC= change in consumption/change in income

non-income determinants of consumption and saving
real interest rates
business taxes
when government is considered, firms look to expected returns after taxes in making their investment decisions. An increase in business taxes lowers the expected profitability of investments and shifts the investment demand curve to the left, a reduction of business taxes shifts it to the right.
technological change
the development of new products, improvements in existing products, and the creation of new machinery and production processes

a rapid rate of technological progress shifts the investment demand curve to the right

ex:internet services, cell phones, HD televisions, and cholesterol medications

Stock of capital goods on hand
firms with excess production capacity have little incentive to invest in new capital
planned inventory changes
an increase in inventories is counted as positive investment while a decrease in investment is counted as negative investment

firms planning to increase inventories shifts the curve to the right

firms planning to decrease their inventories shifts the curve to the left

variability of profits
high current profits often generate optimism about the future profitability of new investments

firms often save a portion of current profits as retained earnings and use these funds to finance new investments

determines how much larger that change will be

it is the ratio of a change in GDP to the initial change in spending

muliplier=change in real GDP/initial change in spending

Categories: Macroeconomics