Chapter Four

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• Chapter Four
• Investment Spending and Multiplier

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• 1. Investment Decision Three Methods
  
• Present value
• Expected returns
• Expected costs

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• For example
• A project expected to generate 500 of income
  and to cost 401 to operate left is 99.
• Assuming an investor can earn 10 with his
  money elsewhere, he would be willing to pay 90
  for the capital good.
• Is the project worth of investing or not ?

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• Total cost vs. Total revenues
  
• TR PQ
• TC three components
• value of capital assets
• borrowing cost
• operating costs
• Example.
  

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• The Marginal Efficiency of Investment (MEI)
• MEI is the rate of return that equates the
  expected flow of revenues in excess of expected
  non-capital costs (efficiency) from one
  additional newly constructed asset to the cost of
  purchasing the asset (investment).

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2. MEI Curve for Firm
MEI
Investment
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• Derivation of the MEI curve
• Why the MEI curve negatively slopes to the right ?

i
MEI curve
I
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• 3. Investment decision factors analysis
• expected revenue
  
• interest rate
  
• accelerator effect
  
• new technologies new products
• new resources new population growth.
• 4. Investment Function
  
• autonomous investment
  
• induced investment
• investment function
• I I0 e Y

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• 5. Equilibrium Output (GDP)
• Simple Economy ( two sectors)
  
  
• A) Equilibrium output
• 45 degree methods
• B) Equilibrium condition IS
  
• Formula for equilibrium output
  
• ADYCIabYIGDP
• Y1/1-baI

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• 6. Gap
  
• Difference between the equilibrium output and
  full employment output
  
• Deflation gap and inflation gap
• 7. Thrift paradox views on saving
• Classical view
• Modern view

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AD
AD
Deflation gap
AD
45
Y
Equilibrium output
Full employment output
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• 8. Multiplier
  
• Definition------is the amount by which
  equilibrium output changes when autonomous
  aggregate demand increases by one unit
  
  
• Example Investment Multiplier
  
• Formula for Multiplier
  
• Multiplier in Pictures

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• Some problems
  1. Suitability
  2. Duality
  3.
  Limitation
• Multiplier effects
  Consider
• one time investment and successive investment