Keynes identified three factors that affect consumption:
Disposable income: For most people, the single most powerful determinant of how much they consume is how much income they have in their take-home pay, also known as
disposable income , which is income after taxes.
Expected future income: Consumer expectations about future income also are important in determining consumption. If consumers feel optimistic about the future, they are more likely to spend and increase overall aggregate demand. News of recession and troubles in the economy will make them pull back on consumption.
Wealth or credit: When households experience a rise in wealth, they may be willing to consume a higher share of their income and to save less. When the U.S. stock market rose dramatically in the late 1990s, for example, U.S. rates of saving declined, probably in part because people felt that their wealth had increased and there was less need to save. How do people spend beyond their income, when they perceive their wealth increasing? The answer is borrowing. On the other side, when the U.S. stock market declined about 40% from March 2008 to March 2009, people felt far greater uncertainty about their economic future, so rates of saving increased while consumption declined.
Finally, Keynes noted that a variety of other factors combine to determine how much people save and spend. If household preferences about saving shift in a way that encourages consumption rather than saving, then AD will shift out to the right.
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What determines investment expenditure?
Spending on new capital goods is called
investment expenditure . Investment falls into four categories: producer’s durable equipment and software, new nonresidential structures (such as factories, offices, and retail locations), changes in inventories, and residential structures (such as single-family homes, townhouses, and apartment buildings). The first three types of investment are conducted by businesses, while the last is conducted by households.
Keynes’s treatment of investment focuses on the key role of expectations about the future in influencing business decisions. When a business decides to make an investment in physical assets, like plants or equipment, or in intangible assets, like skills or a research and development project, that firm considers both the expected benefits of the investment (expectations of future profits) and the costs of the investment (interest rates).
Expectations of future profits: The clearest driver of the benefits of an investment is expectations for future profits. When an economy is expected to grow, businesses perceive a growing market for their products. Their higher degree of business confidence will encourage new investment. For example, in the second half of the 1990s, U.S. investment levels surged from 18% of GDP in 1994 to 21% in 2000. However, when a recession started in 2001, U.S. investment levels quickly sank back to 18% of GDP by 2002.
Interest rates also play a significant role in determining how much investment a firm will make. Just as individuals need to borrow money to purchase homes, so businesses need financing when they purchase big ticket items. The cost of investment thus includes the
interest rate . Even if the firm has the funds, the interest rate measures the opportunity cost of purchasing business capital. Lower interest rates stimulate investment spending and higher interest rates reduce it.
Questions & Answers
Discuss the differences between taste and flavor, including how other sensory inputs contribute to our perception of flavor.
The lymphatic system plays several crucial roles in the human body, functioning as a key component of the immune system and contributing to the maintenance of fluid balance. Its main functions include:
1. Immune Response: The lymphatic system produces and transports lymphocytes, which are a type of
asegid
to transport fluids fats proteins and lymphocytes to the blood stream as lymph
Anatomy is the study of the structure of the body, while physiology is the study of the function of the body. Anatomy looks at the body's organs and systems, while physiology looks at how those organs and systems work together to keep the body functioning.
Enzymes are proteins that help speed up chemical reactions in our bodies. Enzymes are essential for digestion, liver function and much more. Too much or too little of a certain enzyme can cause health problems
Kamara
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Prince
how does the stomach protect itself from the damaging effects of HCl
the normal temperature is 37°c or 98.6 °Fahrenheit is important for maintaining the homeostasis in the body
the body regular this temperature through the process called thermoregulation which involves brain skin muscle and other organ working together to maintain stable internal temperature