III. UNIT III
B. The Consumption Function
1. Autonomous consumption...
identification and determining
factors
2. Induced consumption...
identification and determining
factors
3. Calculation of MPC and MPS
C. Determinants of Planned Investment
D. Composition of Aggregate Demand
E. Identification of recessionary
and Inflationary Gaps
1
DETERMINANTS OF PLANNED
INVESTMENT
Planned!!
2
DETERMINANTS OF PLANNED
INVESTMENT
1. EXPECTATIONS (ABOUT EARNINGS/
PROFITS)
2. REAL INTEREST RATE
3
8% ANNUAL INTEREST ON CAR LOAN
4
8% ANNUAL INTEREST ON CAR LOAN
LENDER EXPECTS 5% INFLATION
PER YEAR
5
8% ANNUAL INTEREST ON CAR LOAN
LENDER EXPECTS 5% INFLATION
PER YEAR
INFLATION PREMIUM
6
8% ANNUAL INTEREST ON CAR LOAN
LENDER EXPECTS 5% INFLATION
PER YEAR
INFLATION PREMIUM
REAL INTEREST RATE - - 3%
7
PRICE OF NEW FACTORY IS 1,000,000.
ANNUAL DEPRECIATION WILL BE
$0 EACH YEAR.
SHOULD HE BUILD----IF HE DOES
THE $1,000,000 WILL BE PART OF PI.
8
PRICE OF NEW FACTORY is 1,000,000
ANNUAL DEPRECIATION WILL BE
$0 EACH YEAR.
SHOULD HE BUILD----IF HE DOES
THE $1,000,000 WILL BE PART OF PI.
SUPPOSE HE BELIEVES FACTORY
WILL CAUSE EXTRA $100,000 IN
REVENUE PER YEAR (OR A ________% 9
RATE OF RETURN)
PRICE OF NEW FACTORY is 1,000,000
ANNUAL DEPRECIATION WILL BE
$0 EACH YEAR.
SHOULD HE BUILD----IF HE DOES
THE $1,000,000 WILL BE PART OF PI.
SUPPOSE HE BELIEVES FACTORY
WILL CAUSE EXTRA $100,000 IN
10
REVENUE PER YEAR (OR A ________%
10
RATE OF RETURN)
INTEREST RATE = 15%
BUILD OR NOT?
PRICE OF NEW FACTORYIS 1,000,000.
ANNUAL DEPRECIATION WILL BE
$0 EACH YEAR.
SHOULD HE BUILD----IF HE DOES
THE $1,000,000 WILL BE PART OF PI.
SUPPOSE HE BELIEVES FACTORY
WILL CAUSE EXTRA $100,000 IN
10
REVENUE PER YEAR (OR A ________%
11
RATE OF RETURN)
INTEREST RATE = 15%
BUILD OR NOT?
PRICE OF NEW FACTORYIS 1,000,000.
ANNUAL DEPRECIATION WILL BE
$0 EACH YEAR.
SHOULD HE BUILD----IF HE DOES
THE $1,000,000 WILL BE PART OF PI.
SUPPOSE HE BELIEVES FACTORY
WILL CAUSE EXTRA $100,000 IN
10
REVENUE PER YEAR (OR A ________%
12
RATE OF RETURN)
INTEREST RATE = 5%
BUILD OR NOT?
PRICE OF NEW FACTORYIS 1,000,000.
ANNUAL DEPRECIATION WILL BE
$0 EACH YEAR.
SHOULD HE BUILD----IF HE DOES
THE $1,000,000 WILL BE PART OF PI.
SUPPOSE HE BELIEVES FACTORY
WILL CAUSE EXTRA $100,000 IN
10
REVENUE PER YEAR (OR A ________%
13
RATE OF RETURN)
INTEREST RATE = 5%
BUILD OR NOT?
PRICE OF NEW FACTORYIS 1,000,000.
ANNUAL DEPRECIATION WILL BE
$0 EACH YEAR.
SHOULD HE BUILD----IF HE DOES
THE $1,000,000 WILL BE PART OF PI.
SUPPOSE HE BELIEVES FACTORY
WILL CAUSE EXTRA $100,000 IN
10
REVENUE PER YEAR (OR A ________%
14
RATE OF RETURN)
GENERALIZATION
GIVEN EXPECTATIONS:
INTEREST RATE UP
PLANNED I DOWN
INTEREST RATE DOWN
PLANNED I UP
15
GENERALIZATION
GIVEN EXPECTATIONS:
INTEREST
RATE
INTEREST
RATE UP
PLANNED I DOWN
INTEREST RATE DOWN
PLANNED I UP
PLANNED I16
GENERALIZATION
GIVEN EXPECTATIONS:
INTEREST
RATE
INTEREST
RATE UP
PLANNED I DOWN
5%
INTEREST
RATE DOWN
PLANNED I UP
PI FOR YEAR
PLANNED 17I
INTEREST RATE = 5%
BUILD OR NOT?
PRICE OF NEW FACTORYIS 1,000,000.
ANNUAL DEPRECIATION WILL BE
$0 EACH YEAR.
SHOULD HE BUILD----IF HE DOES
THE $1,000,000 WILL BE PART OF PI.
SUPPOSE HE BELIEVES FACTORY
WILL CAUSE EXTRA $100,000 IN
10
REVENUE PER YEAR (OR A ________%
18
RATE OF RETURN)
INTEREST RATE = 5%
BUILD OR NOT?
PRICE OF NEW FACTORYIS 1,000,000.
ANNUAL DEPRECIATION WILL BE
$0 EACH YEAR.
SHOULD HE BUILD----IF HE DOES
THE $1,000,000 WILL BE PART OF PI.
SUPPOSE HE BELIEVES FACTORY
WILL CAUSE EXTRA $10,000 IN
1%
REVENUE PER YEAR (OR A ________%
19
RATE OF RETURN)
GENERALIZATION:
GIVEN INTEREST RATE:
WHEN EXPECTATIONS FALL
PLANNED I FALLS
WHEN EXPECTATIONS RISE
PLANNED I RISES
20
GENERALIZATION
GIVEN EXPECTATIONS:
INTEREST
RATE
INTEREST
RATE UP
PLANNED I DOWN
5%
INTEREST
RATE DOWN
PLANNED I UP
PI FOR YEAR
PLANNED I21
GENERALIZATION
GIVEN EXPECTATIONS:
INTEREST
RATE
INTEREST
RATE UP
PLANNED I DOWN
5%
INTEREST
RATE DOWN
PLANNED I UP
PI FOR YEAR
PLANNED I22
AUTONOMOUS I
VERSUS
INDUCED I
23