Interest Rates & Investment Demand- 02/21/2017

Interest Rates & Investment Demand- 02/21/2017

Investment:
- money spent on expenditures
- ex) new factories, capital equipment, technology, new homes, inventories

How do businesses make investment?
- Expected rates of return
-cost/ benefit analysis

How do businesses determine benefits?
- Expected rate of return
- Interest cost

How do businesses count cost amount of investment they undertake?
- Compare expected rate of return to interest cost
- If expected return > interest cost, then invest
- If expected return < interest cost, do not invest

-Real- r
-Nominal – i

-Inflation- π

- r% = i% = π%

-Real interest rate determines the cost of an investment decision
- On the investment demand curve, demand will be downward sloping
-When interest rates are high, fewer investments are profitable, when interest rates are low, more investments are profitable

Shifts in ID
-cost of production
-Business taxes
-Technological change

- Stock of Capital
- Expectations

Aggregate Supply
- Level of GDP that firms will produce at each Price Level

Long run vs. Short run
1) Long run:
-period of time where input prices are completely flexible and adjust to change in the price level
-Level of real GDP supplied is independent of price level
-Makes the level of full employment

2) Short run
-Period of time where input prices are sticky and do not adjust to changes in the price level
-Level of real GDP supplied is directly related to price level

Determinants of SRAS:
-input prices
-productivity

-legal institutional environment

Input prices:
-wages (75% of all business costs)
-cost of capital
-raw materials (community prices)

Foreign resource price

-Strong money = lower foreign resource price
-weak money = higher foreign resource prices

Market power
-monopolies and cartels that control resources that control the prices of those resources
-increase in resource prices = SRAS ß
-decrease in resource prices = SRAS à
-Productivity = total output/ total input
-more productivity = lower unit production cost = SRAS à
-lower productivity = higher unit production cost = SRAS ß

Legal institution Environment
-taxes + subsidies
-taxes to government on business increase per unit production cost = SRAS ß
-subsides to business reduces per unit production cost = SRAS à

Government Regulation
-Government regulation creates a cost of compliance = SRAS ß
-Reregulation reduces compliance costs = SRAS à

Determinants of AD- 02/17/2017

Determinants of AD

Determinants of AD:
-Consumption (C)
-Gross private investment  (Ig)

-Government spending (G)

-Net exports (Xn)

Change in consumer spending
-Consumer wealth (boom in the stock market)
-Consumer expectations (people fear a recession)
-Household indebtedness (more consumer debt)

-Taxes (decrease in income taxes)

Change in investment spending
-Real interest rates (price of borrowing money)
-Future business expectations (high)
-Productivity + Technology (new robots)
-Business taxes (higher corporate taxes)

Government Spending
-War
-Nationalized Health Care
-Decrease in defense spending
-More government spending = increase in AD
-Less government spending = decrease in AD

Change in net exports
-exchange rates
-National income compared to abroad
-AD = GDP = C+Ig+G+Xn

Aggregate Demand Curve- 02/16/ 17

Aggregate Demand Curve

Aggregate demand curve:
- demand by consumes, businesses, government and foreign countries

- Changes in price level cause a move along the curve not a shift of the curve

- Shows the amount of Real GDP that the private, public and foreign sector collectively desire to purchase at each possible prices level
-The relationship between the prices level and the level of read GDP is inverse

-3 Reasons AD is downward sloping

            1) Wealth Effect
                  -Higher prices reduce purchasing power of money
                  -This decreases the quantity of expenditures
                  -Lower price levels increases purchasing power and increase expenditure

            2) Interest- Rate Effect

                   -As price level increases, lenders need to charge higher interest rates to get a real return or their loans
                   -Higher interest rates discourage consumer spending and business investment

            3) Foreign Trade Effect

                  -When U.S price level rises, foreign buyers purchase fewer U.S goof and Americans buy more foreign goods.

                  -Exports fall and inputs rise causing real GDP demanded to fall

(Xn Decreases)
                        1) A change in C, Ig, G, and or Xn

                        2) A multiplier effect original change in the 4 components

                             -increase in AD = AD ->
                             -Decrease in AD = AD <-

Unemployment - February 09, 2017

Unemployment

• Unemployment:
  - % of people who do not have jobs that are in the labor force
  
• Unemployment rate:
  - # unemployed   *100
    # in labor force
  -Labor force: employed + unemployed
  -Standard # is 4-5%
  
  
• Not Counted in the labor force:
  -Kids
  -Military personnel
  -People in mental institutions
  -Homemakers
  -Retired people
  -Full time students
  -Incarcerated people
  -Discouraged
  
  
• 4 types of unemployment
  1) Frictional
      -Temporarily employed or in between jobs
      -Individuals are qualified workers with transferable skills but arent working
      -Individuals who are fired and looking for better jobs
  
  2) Seasonal
      -Specific type of frictional unemployment which is due to the time of the year and nature of the job
      -These jobs will come back
      -Construction workers are an example
  
  3) Structural 
      -Changes in the structure of the labor force makes some skills obsolete
      -Workers do not have transferable skills and these jobs will never come back
      -Workers must learn new skills to get a job
      -The permanent loss of these jobs is called "creative destruction"
     
  4) Cyclical
      -Downturns in the business cycle, which will result in a recession
      -As demand for goods and services falls, demand for labor falls and workers are fired
      -Restaurant owners fire workers after months of poor sales due to recessions
  
• The national rate and Full Employment
  -Two of the three tyoes of unemployment are unavoidable ( frictional and structural)
  - Frictioanl (+) Structural (=) NRU (4-5%)
  - National rate of unemployment is NRU
  - Full employment = no cyclical unemployment
  
• Okun's law:
  -When unemployment rises 1% above the NRU, GDP falls about 2%
  
• Who are employed people?
  - Part-time workers
  - Leave of absence
  - Employed even if you work 1 hour a month
  
  
  
  
                                  
  

Inflation- February 06, 2017

Inflation

• Inflation:
  -Increase or rise in price or general rising level of prices
  -Reduces the 'purchasing power' of money
• Purchasing power:-Amount of goods and services that your money can buy

• Three Cause of Inflation1) Printing too much money
  2) Demand- Pull inflation   
      -caused by an excess of Demand over output that pulls prices upward
  3) Cost- Pull inflation    
      -caused by a rise in per unit production costs due to increasing resource cost
• Inflation rate:
  -Ideal inflation rate is 2- 3%
  -(Current Price index - Base year price index)  * 100
                    Base year price index
• Rule of 70
  -Used to calculate the # of years it will take for the price level to double at any given rate of inflation
  -(70/annual rate of inflation)
• Deflation:
  -General decline in the price level
• Disinflation:
  -Occurs when the inflation rate itself declines
• Nominal Interest rate
  -Unadjusted cost of borrowing or lending money
• Real interest rate:
  -Cost of borrowing or lending money adjusted for inflation
  -Real = nominal interest rate - expected inflation
• Unanticipated inflation (Hurt by inflation):
  -Lenders - people who lend money at fixed interest rates
  -People with fixed incomes
  -Savers
• Anticipated inflation (Helped by inflation):
  -Borrowers- people who borrow money
  -A business where the price of the product increases faster than the price of resources
• Cost of Living Adjustment (COLA):
  -Some workers have salaries that mirror inflation
  -They negotiate wages that rise with inflation

Real GDP vs. Nominal GDP- February 03, 2017

Real GDP vs. Nominal GDP

• Nominal GDP:
  -Value of output produced in current year prices
  -Can increase from year to year, if either output or price increase
  -P * Q
  -In the base year, real & nominal GDP are equal
  -In years after the base year, nominal will exceed
  -Current Quantity * Current price
• Real GDP:
  -Value of output produced in constant based year prices.
  -Adjusts for inflation
  -Only increases if output increases
  -P * Q
  -Measures economic growth
  -Current quantity * Base year Price
• GDP Deflator:
  -Price index used to adjust from Nominal to Real GDP
  -(Nominal GDP/Real GDP) * 100
  -In the base year, GDP deflator will always equal to 100
  -For years after that, GDP deflator is greater than 100
  -For years before the base year, GDP deflator is less than 100
• Consumer Price Index (CPI)
  -Measures inflation by tracking changes in the price of a market basket of goods
  -(Price of market Basket in current year/Price of market basket in base year) *100

Calculations- February 01, 2017

Calculations

• Trade:
  - Exports (-) imports
  - Positive = Surplus
  - Negative = Deficit
• Budget:
  -Government purchases of goods/services (+) Government Transfer Payments (-) Government Tax and Fee Collection
  -Positive = Deficit
  -Negative = Surplus
• National Income:
  1. Compensation of employees (+) Rental income (+) Interest Income (+) Proprietor's Income (+) Corporate Profits
  2. GDP (-) Indirect Business Taxes (-) Depreciation (-) Net Foreign Factor Payment
• Disposable Income: 
  - National income (-) Personal household taxes (+) Government transfer payments.
• Net Domestic Product:
  -GDP (-) Depreciation
  
  
• Net national Product:
  -GNP (-) Depreciation
• Gross National Product:
  -GDP (+) Net Foreign Factor Payment
• Depreciation:
  -Consumption of fixed capital
  -Wear & tear of capital equipment
  
  
• Gross Investment:
  -Net investment (+) Depreciation