MACROECONOMICS: INCOME AND EMPLOYMENT DETERMINATION (set 2)

how does a change in cost of production shift the AS curve?

↑ cost of production (decrease in AS): shifts the curve up (just the horizontal portion) ↓ cost of production (increase in AS): shifts the horizontal part of curve down

what is the curve for investments called?

Marginal efficiency of investments (MEI) curve (downwards sloping) - basically a demand curve for investments

how does a change in productive capacity shift the AS curve?

↑ productive capacity (increase in AS): shifts the vertical part of the graph rightwards ↓ productive capacity (decrease in AS): shifts the vertical part of the graph leftwards

multiplier formula

△NY= k x △AD

what is the demand supply equivalent model for macroeconomy?

aggregate demand and aggregate supply

does a change in non-interest rate factor cause a shift in or movement along the MEI curve?

causes a shift in the mei curve

what causes a shift in AS curve?

changes in non gpl factors

what does the C in the eqn for AD represent?

consumption of ONLY domestically produced goods and services

how is the ad curve sloped?

downward sloping

when using circular flow to explain multiplier what terminologies must you use?

equilibrium/ disequilibrium unplanned rundowns/ unplanned pile ups/ planned _____ e.g. ↑ in G causes planned injections > planned withdrawals --> unplanned rundown on inventories occur --> triggers k process new and higher level of real NY achieved when planned W= planned J again

What does Yf represent?

full employment level of income

what is the multiplier effect?

initial autonomous change in AD leads to a more than proportionate change in national income

what is the relationship b/w gpl and national income?

inverse relationship

how does a change in both pdtive capacity and cost of production affect the curve?

inwards/outwards

does a change in interest rate factor cause a shift in or movement along the MEI curve?

movement along

when does equilibrium in circ flow of income occur?

planned injections = planned withdrawals

what determines the level of spare capacity in the economy? state of economy e.g. boom/recession or developed/developing country?

state of economy

what are investments?

- act of acquiring new fixed capital assets (e.g. plants and machines) - accumulating of inventories (e.g. raw materials, semi finished goods)

what is induced consumption?

- changes in consumption that arise from changes in income

what is autonomous consumption?

- changes in consumption unrelated to changes in income

what do the injections of circ flow of income compose of?

- investment - government expenditure - exports

what is the brief version of reverse multiplier effect

- one man's fall in spending is another man's fall in income and less income leads to further rounds of less spending - there will be many rounds of fall in induced consumption and income but in each successive round the fall in induced consumption is smaller because of the presence of withdrawals - eventually the process ends when the cumulative fall in withdrawals equals to initial fall in autonomous AD. - a new and lower level of national Y will be achieved

what is the principle behind the multiplier effect?

- one man's spending is another person's income and this income stimulates further rounds of consumption

what is the brief version of multiplier effect

- one man's spending is another person's income and this income stimulates further rounds of spending - the increase in government spending creates new income which is either spent on domestically pduced goods and services or M or saved or paid in taxes. - this process of spending and re-spending is repeated over many rounds as income flows back into the circular flow - however, the multiplier process eventually stops because the presence of leakages at each successive round cause the induced consumption at each round to be smaller and smaller

What do withdrawals from the circ flow of income consist of?

- savings - taxes - imports

when is potential growth achieved?

- when full employment output increases (Yf increases)

what are the 2 types of consumption?

1. autonomous consumption 2. induced consumption

what are the 4 assumptions for the multiplier effect?

1. availability of spare capacity 2. no change in gpl 3. constant state of technology 4. absence of time lags

what are the 8 determinants of consumption expenditure?

1. changes in consumer confidence - if they expect economy to be in a boom in the future --> spend more now - autonomous consumption increases 2. changes in interest rates * - fall in i/r --> cost of borrowing lower + fall in returns on savings --> increase in consumer borrowing to spend on big tix items 3. changes in exchange rates * - if sgd depreciates against usd --> imports from us will be more expensive in terms of SG$ --> consumers switch from consuming the more expensive imported goods to cheaper domestic goods --> auton. C increases 4. changes in wealth - value of assets ppl own increases --> ppl feel wealthier --> demand more --> auton. C ↑ 5. changes in income distribution - income redistributed to the poor --> poor more likely to spend an ↑ in income than the rich --> ↑in auto consump. 6. changes in personal income taxes - PIT lowered, disposable income ↑ --> rise in consumption - NEITHER AUTO OR INDUCED 7. changes in domestic country's real NY - causes induced consumption 8. expectation of future prices (similar to 1) * - if future prices were to increase --> consume more now

what are the 2 determinants of govt expenditure

1. changes in economic priorities 2. changes in political priorities

6 determinants of investment expenditure

1. changes in i/r 2. changes in business confidence and expectations - firms optimistic about future sales --> expect rate of returns ↑ --> mei curve shifts right --> investments ↑ 3. changes in corporate tax rates - reduce CT --> after tax profits ↑ --> more money to invest --> investment expenditure ↑ 4. changes in technology - implementation of new tech requires new capital which comes from investments --> investments↑ 5. rate of change of income - bigger the increase in income --> more investment needed to produced more goods - induced 6. changes in exchange rates - impact on investment is uncertain - depreciation reduces cost of doing business thus encourages foreign investments. but profits made by foreign investments subjected to depreciation when exchanged to domestic terms thus reduce in foreign investments --> opposing effects

6 determinants of aggregate supply

1. changes in input prices - rise in COP - if rise in COP due to long term depletion of resources then pdtive capacity affected hence shift curve inwards 2. changes in expected rate of inflation - if prices of goods increase then trade unions will negotiate for higher wage thus cost of production increase ↑ 3. changes in qty of resources - increase in quantity of resources --> pdtive capacity ↑ 4. changes in quality of resources - increase in labour productivity --> ↑ pdtive capacity + higher productivity （assuming that wage rises does not exceed rises in labour productivity --> cop decreases) 5. technological advancements - new and less costly ways of production --> pdtive capacity increases + cost of production decreases 6. government policies and structural changes - subsidies on certain items can lower cop - law enforcement and establishment of property rights can lower business costs

3 determinants of net exports

1. changes in national income of foreign/trading partners - trading partners' income levels ↑ demand for domestic country's gds ↑ --> x-m ↑ 2. changes in relative price levels b/w countries - domestic goods gpl falls --> more local ppl consume domestic goods and foreign also consume imports from the domestic country --> x-m ↑ 3. changes in foreign e/r

what are the 2 defns of interest rates?

1. cost of borrowing 2. rate of returns

what are the limitations of the multiplier process

1. different size of MPC - e.g. in sg, consumer alotta exports and also compulsory saving schemes + asian society value thrift --> size of withdrawals very large --> net effects of the multiplier is dampened v quickly due to the k process ending really quickly 2. level of spare capacity in the economy - multiplier effect not experienced to full extent when there is no spare capacity in the economy - resources are increasingly scarce and shortages will form in response to higher demand. Firms can only respond to this demand by stepping up on production in next time period. - Firms also increase prices as additional cost of producing a unit more of output has increased -increase in gpl reduces the pp of hseholds hence real consumption falls --> dampens multiplier effect - just explain on the AD-AS graph 3. time lags - weeks, months will be required for each successive round of spending. only a fraction of multiplier will be observed quickly.

what are the 3 regions of as curve?

1. horizontal 2. intermediate 3. vertical

how to explain the change in i/r causing change in quantity of investments? (for essays)

1. state the inverse relationship between interest rate and quantity of investments 2. explain why there is this inverse relationship - higher i/r means the expected rate of return is lower than i/r --> will not engage in investments - lower i/r means expected rate of return is higher than i/r --> engage in investments 3. draw curve 4. show movement along curve

why is there an inverse relationship b/w gpl and national income (3 effects)

1. wealth effect - gpl falls, real pp of households increases, can buy more goods and services 2. interest rate effect - gpl falls --> hseholds need less money to buy typical items --> more money for savings --> more savings --> interest rate (cost of borrowing) to decrease --> encourages borrowing --> consume more 3. international substitution effect - if domestic good gpl falls while foreign goods gpl remains constant. foreign demand for country's gds increases --> higher consumption of domestic goods and svcs

formula to find k

1/(1- MPC) = 1/MPW

equation for AD?

C+I+G+(X-M)

What is aggregate demand?

total level of spending in an economy at each gpl

What is aggregate supply?

total output of goods and services that all domestic firms would produce and sell at each gpl

when will firms undertake investment?

when MEI> i/r - MEI is the expected rate of return of an additional unit of investment

what is the equilibrium level of national income

when aggregate supply = aggregate demand

what are the x and y axis of ad and as?

y axis: general price level x axis: real national income

what are the xy axis of the curve?

y: mei/interest rate x: quantity of investments

is government expenditure always autonomous?

yes