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Chapter 11: Q1. (page 236)

What is an investment schedule, and how does it differ from an investment demand curve?

Short Answer

Expert verified

An investment schedule is an amount invested by firms altogether at different income levels.

Difference between investment schedule and investment demand:

Investment Schedule
Investment Demand
Investment by firms collectively at different levels of income
Investment planned by firms at different interest rates
Depends on income
Depends on real interest rates and expected rates of return

Step by step solution

01

Meaning of investment schedule

An investment schedule is a set of data for an aggregate amount invested by the firms at different income levels to produce the output. The variable on which the investment schedule depends is income.

It is the supply of investment that is forthcoming in the economy. At equilibrium, the investments are equal to the savings.

For instance, the following investment schedule shows the investment amount at each level of income:

Income (in billion dollars)
Investment (in billion dollars)
40060
45070
50080
55090
600100

According to the above table, investment is constantly increasing by $10 billion for each increase of $50 billion in income.

02

Step 2. Comparison with the investment demand

The differences between the investment schedule and investment demand are as follows:

  • An investment demand curve shows the graphical relationship between the aggregate investment that firms may be willing to invest in and different interest rates. In contrast, an investment schedule is a table showing the aggregate amount invested at varying levels of income.

  • The investment demand curve involves the expected rate of return and real interest rate, while the investment schedule depends on income.

  • The investment demand curve is inversely related to the interest rate. In contrast, the investment schedule is either constant (in the short run) or positively associated with the income (in the long run).

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Most popular questions from this chapter

Explain graphically the determination of equilibrium GDP for a private economy through the aggregate expenditures model. Now add government purchases (any amount you choose) to your graph, showing their impact on equilibrium GDP. Finally, add taxation (any amount of lump-sum tax that you choose) to your graph and show its effect on equilibrium GDP. Looking at your graph, determine whether equilibrium GDP has increased, decreased, or stayed the same given the sizes of the government purchases and taxes that you selected.

Refer to the accompanying table in answering the questions that follow:

(1) Possible Levels of Employment, Millions

(2) Real Domestic Output, Millions

(3) Aggregate Expenditures (Ca + Ig+ Xn+ G), Millions

90

\(500

\)520

100

550

560

110

600

600

120

650

640

130

700

680

  1. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary expenditure gap or the recessionary expenditure gap? What is the multiplier in this example?

  2. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full employment level of output is $500 billion? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? What is the multiplier in this example?

  3. Assuming that investment, net exports, and government expenditures do not change with changes in real GDP, what are the values of the MPC, the MPS, and the multiplier?

Question: If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by _______ taxes or _______ government expenditures.

  1. increasing; increasing

  2. increasing; decreasing

  3. decreasing; increasing

  4. decreasing; decreasing

If inventories unexpectedly rise, then production _______ sales and firms will respond by _______output.

  1. trails; expanding

  2. trails; reducing

  3. exceeds; expanding

  4. exceeds; reducing

Suppose that a certain country has an MPC of 0.9 and a real GDP of \(400 billion. If its investment spending decreases by \)4 billion, what will be its new level of real GDP?
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