AD and Investment Chris Rodda

1. AS Economics AD and InvestmentChris Rodda

2. Investment Investment is the addition to the capitalstock of the economy made by firms . Investment can be into physicalcapital, such as spending on new factories or raw materials, or investment may be on human capital, such as worker training schemes. However the value of capital will diminish over time as it is used up and suffers wear and tear; this is called depreciation. Net investment is positive if gross investment is greater than depreciation.

3. Determinants of Investment • New Technology • Business confidence • Rate of interest • The accelerator

5. Investment • Technical change will make capital more productive than before and so reduce the need for new investment. • Working capital is spending on stocks of raw materials or finished goods before they are sold.

6. Interest rates Planned investment is determined by expected after-tax real rate of return on capital projects Interest rates may play an influential role – because they represent the opportunity cost of funds used to finance investment schemes A fall in interest rates decreases the cost of investment – planned investment projects on the margin may become financially worthwhile

7. Real rate of interest R3 R1 R2 Investment Demand I3 I1 I2 Planned Capital Investment (Id)

8. Consumption (C) Households Firms..... Withdrawals (w) (or leakages) Injections (j) Income (Y)

9. The Accelerator • The capital:output ratio shows the amount of capital used to to make one unit of production. • If it takes a £5000 machine to make a £1000 worth of socks the capital:output ratio is 5:1 • The accelerator is therefore 5.

10. Output is the same as real national income (Y) Assumes there is no depreciation. Investment depends on the change in income

11. Multiplier/Accelerator model An increase in income leads to accelerator effect i.e.  an increase in investment  injections are > leakages.  injection is multiplied leading to an increase in income  which causes an increase in injections and so on until the productive potential of the economy is reached.

12. Short v long run LRAS1 LRAS2 Price level LRAS P2 P1 AD2 SRAS SRAS AD1 Real National Output Real National Output Y1 Y1 Y2 Yfe Y2 Yfe LRAS moves outward and achieves non inflationary growth AD increases and negative output gap closes

13. EVALUATION The effect of investment (ceteris paribus) will depend on: • Size of the investment • Size of the multiplier and accelerator • Spare capacity in the economy – i.e. how close to full employment we start at. • How well the money is spent and on what. • What else is happening to C, G,X, I (relax ceteris paribus) • Some Investment will leak out as imports, so the value of the multiplier is smaller esp. for the UK. • Unemployment down, imports up in SR, exports up in LR. Inflation up in SR and down in LR.

14. Origami Break

15. Investment Investment is the addition to the ______________ stock of the economy made by ____________. Investment can be into ____________ capital, such as spending on new factories or raw materials, or investment may be on ___________ capital, such as worker training schemes. However the value of capital will diminish over time as it is used up and suffers wear and tear; this is called ___________. Net investment is positive if _________ investment is greater than depreciation.

16. Determinants of Investment • 1. ____________ • 2. the rate of _____________ • 3. Business _____________ • 4. the _____________ theory

18. Investment • ____________ change will make _______ more productive than before and so reduce the need for new investment. • ____________capital is spending on stocks of raw materials or _____________ goods before they are sold.

19. Interest rates Planned investment is determined by expected after-tax ______ rate of return on _______ projects _________ ______ may play an influential role – because they represent the _________ _______ of funds used to finance investment schemes A fall in interest rates decreases the cost of investment – _____________ investment projects on the margin may become financially worthwhile

20. R3 R1 R2 Investment Demand I3 I1 I2

21. Consumption (C) Households Firms..... Withdrawals (w) (or leakages) Injections (j) Income (Y)

22. The Accelerator • The _________:output ratio shows the amount of capital used to to make one unit of production. • If it takes a £5000 machine to make a £1000 worth of socks the capital:output ratio is 5:1 • The accelerator is therefore _____.

23. Assumes there is no depreciation. Investment depends on the change in income

24. Multiplier/Accelerator model An increase in income leads to accelerator effect i.e.   injections are > leakages.  injection is multiplied leading to an increase in income  which causes an increase in injections and so on until the productive potential of the economy is reached.

25. Short v long run LRAS1 Price level LRAS P1 AD2 SRAS SRAS AD1 Real National Output Real National Output Y1 Y1 Y2 Yfe LRAS moves outward and achieves non inflationary growth AD increases and negative output gap closes

26. EVALUATION The effect of investment (ceteris paribus) will depend on: • Size of the _____________ • Size of the ___________ and accelerator • Spare capacity in the economy – i.e. how close to full __________ we start at. • How well the money is spent and on what. • What else is happening to C, G,X, I (relax ____________) • Some Investment will leak out as imports, so the value of the multiplier is ______________ esp. for the UK. • Unemployment down, imports up in SR, exports up in LR. Inflation up in SR and down in LR.

27. Investment Investment is the addition to the ______________ stock of the economy made by ____________. Investment can be into ____________ capital, such as spending on new factories or raw materials, or investment may be on ___________ capital, such as worker training schemes. However the value of capital will diminish over time as it is used up and suffers wear and tear; this is called ___________. Net investment is positive if _________ investment is greater than depreciation.

28. Determinants of Investment • 1. ____ ____________ • 2. the rate of _______ • 3. ___________ confidence • 4. the ________________

30. Investment • ____________ change will make _______ more productive than before and so reduce the need for new investment. • ____________capital is spending on stocks of raw materials or _____________ goods before they are sold.

31. Interest rates Planned investment is determined by expected after-tax real rate of return on _______ projects Interest ______ may play an influential role – because they represent the opportunity _______ of funds used to finance investment schemes A fall in interest rates decreases the cost of investment – _____________ investment projects on the margin may become financially worthwhile

32. R3 R1 R2 I3 I1 I2

33. Consumption (C) Households Firms..... Withdrawals (w) (or leakages) Injections (j)

34. The Accelerator • The ____________ratio shows the amount of capital used to to make one unit of production. • If it takes a £5000 machine to make a £1000 worth of socks the capital:output ratio is _____ • The accelerator is therefore ______

35. Assumes there is no depreciation.

36. Multiplier/Accelerator model An increase in income leads to accelerator effect i.e.   injections are > leakages.   which causes an increase in injections and so on until the productive potential of the economy is reached.

37. Short v long run LRAS1 Price level LRAS P1 AD2 SRAS SRAS AD1 Real National Output Real National Output Y1 Y1 Y2 Yfe LRAS moves outward and achieves non ___________ growth AD increases and __________ output gap closes

38. EVALUATION The effect of investment (ceteris paribus) will depend on: • Size of the _____________ • Size of the ___________ and accelerator • Spare capacity in the economy – i.e. how close to full __________ we start at. • How well the money is spent and on what. • What else is happening to C, G,X, I (relax ____________) • Some Investment will leak out as imports, so the value of the multiplier is ______________ esp. for the UK. • Unemployment _______, imports ___ in SR, exports up in LR. Inflation up in ___ and down in ____.

39. Break

40. Investment Investment is the addition to the ______________ stock of the economy made by ____________. Investment can be into ____________ capital, such as spending on new factories or raw materials, or investment may be on ___________ capital, such as worker training schemes. However the value of capital will diminish over time as it is used up and suffers wear and tear; this is called ___________. Net investment is positive if _________ investment is greater than depreciation.

41. Determinants of Investment • 1. ____________ • 2. ______________ _____________ • 3. ___________ _____________ • 4. the _____________ theory

43. Investment • ____________ change will make _______ more productive than before and so reduce the need for new investment. • ____________capital is spending on stocks of raw materials or _____________ goods before they are sold.

44. Interest rates Planned investment is determined by _________ _______ ________ __________ ___ on _______ projects _________ ______ may play an influential role – because they represent the _________ _______ of funds used to finance investment schemes A fall in interest rates decreases the cost of investment – _____________ investment projects on the _________ may become financially worthwhile

46. Households Firms..... Withdrawals (w) (or leakages) Injections (j)

47. The Accelerator • The _____________________ratio shows the amount of capital used to to make one unit of production. • If it takes a ________machine to make a £1000 worth of socks the capital:output ratio is 5:1 • The _____________ is therefore ______

49. Multiplier/Accelerator model An increase in income leads to accelerator effect i.e.     which causes an increase in injections and so on until the productive potential of the economy is reached.

50. Short v long run LRAS Price level LRAS P1 SRAS SRAS AD1 Real National Output Real National Output Y1 Y1 Yfe LRAS moves outward and achieves ___ ___________ ______ AD increases and the __________ _______ ____ closes