L3 - Putting the Goods and Money Market Together Flashcards
What are the 2 factors that affect investment?
(In this model)
- One factor that affects investment in this model is sales. A company experiencing a high amount of sales will be more incentivized to make an investment into their capital so they can handle this increase in their production
- Another factor that affects investment is the interest rate. If there is a higher interest rate, it is less priftable for firms to invest because a lot of firms borrow to invest.
What is the Investment relation?
Related to the 2 factors that affect investment
- The plus underneath the Y means that as sales increase (production = sales in this model) so does investment
- The minus underneath i means that as interest rates increase investment decrease
What are different forms of C
C = Yd
C = C(Y - T)
C = c0 + c1 (Yd)
What market is the IS relation for?
The goods market
What must happen in the goods market for the equilirbium conditions to be satisfied?
Demand = Supply
Taking into account the IS relation what is the new conditions for equilibrium in the goods market?
It’s an equation
Why is demand an increasing function of output?
- An increase in production leads to an increase in disposable income which leads to an increase in demand and people are likely to spend part of their increase in disposable income on more goods and services
- An increase in production also leads to an increase in investment as firms have to invest in order to produce more (New capital, factories etc.)
Why is the demand curve ZZ drawn as a curve?
Since we have not assumed that the consumption and investment relation is the new equation are linear, ZZ is in general a curve rather than a line
The Derivation of the IS curve
Just read this flashcard and draw it out
What values cause the IS curve to shift?
- The values of taxes, T and government spending, G affects the IS curve and causes it to shift
