The investment demand curve portrays an inverse (negative) relationship between:? | Yahoo Answers
If for some reason households become increasingly thrifty, we could show this by: The investment demand curve portrays an inverse (negative) relationship between: C) an inverse relationship between aggregate consumption and. The Consumption Function shows the relationship between consumption and disposable that when Disposable Income is zero, Savings on average are negative. . This inverse relationship between the real rate of interest and the level of. B) prices are set by aggregate demand and supply. C) the aggregate Skill: Recognition. 6) In the very short term, planned investment ____ Skill: Recognition. 7) A consumption function shows a. A) negative (inverse) relationship between con- .. Skill: Recognition. 52) The graph of the aggregate expenditure curve has.
A simple example will illustrate the difference. The same could be said about sudden increases in the value of a piece of art that you own, the discovery of oil on your property, or increases in the value of your stock portfolio.
Aggregate Demand (AD) Curve
None of these occurrences increases your income, but they all increase your wealth. An increase in wealth will increase your consumption even at the same income level, and can be illustrated by an upward shift in both the Consumption Function and the Savings Function. Obviously, a decrease in wealth will have the opposite effect. Expectations—There are times when consumers adjust their spending, based not on their actual income but rather on their expectations of future changes in their income.
Changes in expectations will cause a shift in the curve, because consumption has changed without an actual chance in income. For example, if you think your income is going to go up in the future, you may consume more today. Not that we suggest this as a wise course of action, but it has been observed that some college seniors start to spend more once they have secured a job, even though that job and its attendant income will not start for a month or two.
This behavior would be illustrated by an upward shift in the consumption function showing that your consumption has increased even though your actual disposable income has not.
Likewise, if for some reason you were pessimistic about your future income rumors floating around the company that layoffs were eminent you might decrease your consumption, even though your actual current income had not changed. Consumer Indebtedness—Consumers adjust their consumption to levels of indebtedness as well.
We observe in the aggregate economy that when indebtedness goes up, consumption falls and savings rise.
Aggregate Demand (AD) Curve
There is a level of debt beyond which consumers feel uncomfortable with additional spending. Even if income has stayed the same, if too much debt accumulates, consumers will start to spend less and pay off debt. This is illustrated by a downward shift in the Consumption Function and an upward shift in the Savings Function remember that paying off debt is the same thing as increasing savings.
The opposite is also true. At low levels of debt people will consume more and save less. You can likely think of other factors that are unrelated to income that could shift the Consumption and Savings Functions. In general, anything that influences consumption or savings that is NOT disposable income will shift the Functions upward or downward.
Any change in disposable income will move you along the Functions. Return to the course in I-Learn and complete the activity that corresponds with this material.
The Interest Rate — Investment Relationship The second component of aggregate expenditures that plays a significant role in our economy is Investment. Remember from our lesson on National Income Accounting that investment only occurs when real capital is created.
The investment demand curve portrays an inverse (negative) relationship between:?
Investment is such an important part of our economy because it affects both short-run aggregate demand and long-run economic growth. The dollars spent on the investment have the immediate impact of increasing spending in the current time period.
But because of the nature of investment, it has a long-term impact on the economy as well. If a company buys a new machine, that machine is going to operate, continue to produce, and will have an impact on the productive capacity of the economy for years to come.
This is in contrast to consumption purchases that do not have the same impact. If you buy and eat an apple today, that apple does not continue to provide consumption benefits into the future. The horizontal axis represents the real quantity of all goods and services purchased as measured by the level of real GDP.
Notice that the aggregate demand curve, AD, like the demand curves for individual goods, is downward sloping, implying that there is an inverse relationship between the price level and the quantity demanded of real GDP. The demand curve for an individual good is drawn under the assumption that the prices of other goods remain constant and the assumption that buyers' incomes remain constant.
As the price of good X rises, the demand for good X falls because the relative price of other goods is lower and because buyers' real incomes will be reduced if they purchase good X at the higher price. The aggregate demand curve, however, is defined in terms of the price level. A change in the price level implies that many prices are changing, including the wages paid to workers.
As wages change, so do incomes. Consequently, it is not possible to assume that prices and incomes remain constant in the construction of the aggregate demand curve.
Three reasons cause the aggregate demand curve to be downward sloping. The first is the wealth effect. The aggregate demand curve is drawn under the assumption that the government holds the supply of money constant. One can think of the supply of money as representing the economy's wealth at any moment in time. As the price level rises, the wealth of the economy, as measured by the supply of money, declines in value because the purchasing power of money falls.
As buyers become poorer, they reduce their purchases of all goods and services. On the other hand, as the price level falls, the purchasing power of money rises. Buyers become wealthier and are able to purchase more goods and services than before. A second reason is the interest rate effect.
As the price level rises, households and firms require more money to handle their transactions. However, the supply of money is fixed. The increased demand for a fixed supply of money causes the price of money, the interest rate, to rise. As the interest rate rises, spending that is sensitive to rate of interest will decline.