Term
| What does the current income hypothesis state? |
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Definition
| That consumption is a function of current Yd |
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Term
| What are the 3 main types of investment expenditures? |
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Definition
1) Fixed capital formation investment: Purchase of fixed assets (land, software, etc); largest section.
2) Residential housing: Creation of new homes
3) Inventory investment: goods produced as inventory for next year. |
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Term
| How is investment calculated? |
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Definition
| Gross investment = net investment (net additions to new K stock) + depreciation investment (replacement investment). |
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Term
| What are the 3 tools used for investment |
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Definition
Equity: Issuing stocks; sells part of ownership, not pay back (least favorable)
Bond: Loan (co must pay back)
Retained earnings: Opportunity cost of interest lost by not lending retained earnings. |
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Term
| What variables influence investment? |
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Definition
Interest (r)
If interest decreases then investment increases.
Change in Y
Depreciation
Confidence
If agents in the firm expect future profit then this will increase. investment.
Technological changes |
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Term
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Definition
q = market value/replacement cost = 1
• If q>1 then I >0
• If q<1 then I<0
q theory includes: Expectations, time, confidence, stock market (if stock price increases, investment increases). |
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Term
| Explain whether borrowing constraints increase or decrease the potency of fiscal policy to influence current aggregate demand in each of the following two cases: (a) A temporary tax cut; (b) An announced future tax cut. |
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Definition
a) A non constrained consumer distributes the tax cut over bother periods, while a borrowing constrained consumer who has lower consumption in the first period will increase 1st quarter consumption more. So fiscal policy is more potent with the presence of borrowing constraints.
b) A future tax cut raises consumption in the 2nd period. A person who is not credit constrained will borrow against that money in the first period, the credit constrained person can't do that, so a future tax cut is more useful to non credit constrained. |
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