question
Investment depends primarily on two factors:
answer
Level of Sales
- Increase in sales and need for production leads to additional investment
The Interest Rate
- If a company needs to buy additional equipment they may need to borrow for it. The higher the interest rate, the less attractive it is to borrow
- At a high enough interest rate additional profits from new equipment will not cover interest payments
- Increase in sales and need for production leads to additional investment
The Interest Rate
- If a company needs to buy additional equipment they may need to borrow for it. The higher the interest rate, the less attractive it is to borrow
- At a high enough interest rate additional profits from new equipment will not cover interest payments
question
Investment Relation
answer
I = I (Y, i)
question
New Demand function:
answer
Y = C(Y - T) + I( Y, i ) + G
question
Increase in Output
answer
Leads to an increase in income and thus to an increase in disposable income
Increase in disposable income leads to an increase in consumption
Also leads to an increase in investment
Increase in disposable income leads to an increase in consumption
Also leads to an increase in investment
question
Factors that shift the IS curve to the left
answer
Any factor that decreases the equilibrium level of output
- Increase in taxes
- Decrease in Govt spending
- Decrease in consumer confidence (decreases consumption given disposable income)
- Increase in taxes
- Decrease in Govt spending
- Decrease in consumer confidence (decreases consumption given disposable income)
question
Factors that shift the IS curve to the right
answer
Any factor that increases the equilibrium level of output
- Decrease in taxes
- Increase in govt spending
- Increase in consumer confidence
- Decrease in taxes
- Increase in govt spending
- Increase in consumer confidence
question
LM Relation
answer
M/P = YL(i)
question
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answer
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