3. What determines the level of investment spending in the economy? Explain why adverse “profits and inventories data” might lead to a “collapse in investment”. There are many theories that give various answers to the question, what determines the level of investment. But given the article above, all the mentioned factors can be explained by considering the simple variables that help decide the economists and monetary policy makers the level of investment spending. The cost of investment and the expected return are the main driving factors for the level of investment. Given the financial debate (scenario) for the Australian economy, it can be clearly seen that the government is intervening to support the housing sector as the aftermaths of financial crisis start to kick in.
People were expecting less return from all business sectors (including housing sector) therefore the Australian Government had to make things more attractive for the investor. After making things ‘easier’ for the housing investor, the government has taken some pressure off the housing sector. This also indicates, the level of investment in the economy was dropping, therefore the government played its part to support the expected return leading to investors putting their money back in the business.
Adverse profits and inventories data can definitely lead reduction in the investment or a ‘collapse’ in the investment. People always invest when they expect greater return than their investments (or costs). Sometimes people or institutes even compromise their profits and do business on break even basis. But this break even or negative profit (loss) cannot continue for long. Economies can withstand these negative profit jolts on short term basis but never on long term basis.
The line about ‘collapse in investment’ is clearly referring to short term reduction in investment on a macro level when there won’t be a pretty picture for the businesses to show to the investors. And the results will not be pretty either as investors will put their money where there is more return on their investments. 2. Use an aggregate expenditure model to explain how the “national economic stimulus strategy and national building for recovery [strategies]” could bring about an economic recovery.
(Note: Answers that discuss the role of the multiplier in an open, governed economy The aggregate expenditure model basically uses two variables to calculate the total investment, planned and unplanned investment. I (Total) = I (Planned) + I (Unplanned) Assuming that the planned portion of our Investment is Autonomous (it will not vary relative to the real GDP) and the unplanned portion is the Induced Autonomous expenditures (It will vary directly relative to the real GDP). We will assume that by ‘economic recovery’ they mean increased investment (preferably private investment). The national economic stimulus strategy will help to improve the planned investment while the national building for recovery will strengthen the private investment.
If all goes according to the intentions of the prime minister national building for recovery will attract private (unplanned) investment and hence will increase the total investment leading to our ‘economic recovery’. Role of Multiplier It is quite obvious that ‘economic stimulus and building for recovery’ will both welcome the investors to spend more (invest more). When money will start accumulating (as investment) in one sector of the economy, it will definitely shift to the other sectors of the economy (according to the multiplier theory).
For example, improved business situation in the housing sector will attract investors. As they will invest in housing, the construction companies will start making profits and will spend more on labor and raw materials for building and that will shift the profits to industries that in turn will spend more on their raw materials and machinery, hence the multiplier effect will show. Answer the following questions: 1. Explain graphically the determination of the equilibrium GDP for the private sector of the economy by: (5 marks) (i) the aggregate expenditures–output approach (ii) the leakages–injections approach for the private sector of the economy a) GDP = C + I + G + X(n) I here is representing the total investment (planned and Unplanned).
The private sector balance shown by the upward sloping curve is showing that the savings are in fact the function of a GDP (Induced Autonomous Expenditure). When the economic growth is better the savings increase. The public sector deficit shown by the downward sloping curve tells that automatic stabilizers are in place and functioning.
It is clear that when GDP falls, tax revenue reduces and the Government will need to spend more on Unemployment – pushing the public budget towards the deficit. b) The non-consumption uses of investment like taxes, savings and imports are the leakages. Investment, purchase and export constitute the injections. The retail turnover rose to 0.3% which is an impressive stimulus (or injection) by the government. It helps in determining the private sector GDP (but not the exact calculation) by showing improvement in the curve of private sector GDP.
Works Cited Aggregate Expenditure, Wikipedia. n.d. http: //en. wikipedia. org/wiki/Aggregate_expenditure (accessed June 23, 2011). Mitchell, Bill. 2009. n. d. http: //bilbo. economicoutlook. net/blog/? p=3574 (accessed June 23, 2011). Robert J. Stonebraker, Winthrop University. The Joy of Economics: Making Sense out of Life. n.d. http: //faculty. winthrop. edu/stonebrakerr/book/equilibrium_gdp. htm (accessed June 23, 2011).