Thuyết trình môn đầu tư tài chính the IS curve hc

Chapter 21

Instructor:
Prof. & Dr. TRAN NGOC THO

Members of Group :
Tran Thi Hang
Duong Duy Hung
To Anh Vu


OUTLINE
1. THE IS CURVE

2. EXTEND: MỘT VÀI QUAN ĐIỂM KHÁC KEYNES VỀ
CHI TIÊU VÀ TỔNG CẦU
BÀI HỌC CHO VIỆT NAM


 Aggregate output fell by 30%,
 Unemployment rising to 25%.

Unemployment rising to over 10%

 were determined by changes in aggregate demand


OUTLINE
PLANNED EXPENDITURE AND AGGREGATE DEMAND

THE COMPONENTS OF AGGREGATE DEMAND

GOODS MARKET EQUILIBRIUM

UNDERSTANDING THE IS CURVE

FACTORS THAT SHIFT THE IS CURVE



Planned expenditure

Actual expenditure

The total amount of spending on domestically
produced goods and services that households,
businesses, the government, and foreigners want to
make.

is the amount that they actually do spend, which
equals the total amount of output produced in the
economy

Keynes viewed aggregate demand, the total amount of output
demanded in the economy, as being the same as planned
expenditure


Consumption expenditure (C)
• the total demand for consumer goods and services (e.g., hamburgers,
iPods, rock concerts, visits to the doctor, etc.)

Planned investment spending (I)
• the total planned spending by businesses on new physical capital
(e.g., machines, computers, factories) plus planned spending on new
homes

Government purchases (G)
• the spending by all levels of government on goods and services (e.g.,
aircraft carriers, government workers, red tape), not including
transfer payments

Net exports (NX),
• the net foreign spending on domestic goods and services, equal to
exports minus imports

(1)



1. Consumption expenditure
What determines how much you spend on
consumer goods and services?
-

Income
Hobbies
Habit
Asset
….

(denoted by YD), the total income
Disposable income
available for spending, equal to
aggregate output (Y ) minus taxes T
(Y - T).


Consumption Function
The relationship between disposable income YD and
consumption expenditure C

𝐶

: autonomous consumption expenditure, the amount
of consumption expenditure that is exogenous.

mpc : the marginal propensity to consume, reflects the
change in consumption expenditure that results from an
additional dollar of disposable income.
Keynes assumed that mpc was a constant between the values
of 0 and 1


2. Planned Investment Spending
Meaning of the Word Investment
They are normally referring to the purchase of common
Noneconomists stocks or bonds, purchases that do not necessarily
involve newly produced goods and services.

Economists

They are referring to the purchase of new physical
assets, such as new machines or new houses
purchases that add to aggregate demand.


Planned Investment Spending
Fixed Investment
Planned spending by firms on:
• Equipment (machines, computers,
air-planes)
• Structures (factories, office buildin
gs, shopping centers)
• Planned spending on new residenti
al housing

Inventory Investment
Spending by firms on additional
holdings of raw materials, parts,
and finished goods, calculated
as the change in holdings of
these items in a given time
period—say, a year


Inventory Investment

December 31, 2014
150,000 cars

December 31, 2013

Wholesale price: $20,000

100,000 cars
wholesale price: $20,000

Inventory investment in 2014 is $1 billion
($3 billion minus $2 billion)


Inventory Investment

December 31, 2013

100,000 cars
wholesale price: $20,000

December 31, 2014

50,000 cars
Wholesale price
: $20,000

Inventory investment in 2014 is –$1 billion
($1 billion minus $2 billion)


Inventory Investment

Ford may also have additional inventory investment
if the level of raw materials and parts that it is
holding to produce these cars increases over the
course of the year.
• December 31, 2013, it holds $50 million of steel
used to produce its cars.
• December 31, 2014, it holds $100 million

It has an additional $50 million of inventory
investment in 2014


Inventory Investment

December 31, 2014
150,000 cars

December 31, 2013

Wholesale price: $20,000

100,000 cars
wholesale price: $20,000

Some inventory investment can be unplanned (in contrast, fixed
investment is always planned).
Adjusting production to eliminate unplanned inventory investment
plays a key role in the determination of aggregate output.

Planned Investment Spending and Real Interest
Rates
Planned investment spending is equal to planned fixed
investment plus the amount of inventory investment
planned by firms.

Keynes considered the level of the real cost of
borrowing to be a key determinant of planned
investment spending.


Planned Investment Spending and Real Interest
Rates
The real interest rate is high

10%, fewer investments in physical capital will earn more
than the 10% cost of borrowed funds
The real interest rate is low

1%, many investments in physical capital will earn more
than the 1% interest cost of borrowed funds
The real interest rate are low, business firms are more likely
to undertake an investment in physical capital, and planned
investment spending will increase.


Planned Investment Spending and Real Interest
Rates
 If a company has surplus funds and does not need to borrow
to undertake an investment in physical capital.

 Instead of investing in physical capital, it could purchase a
security, such as a bond.
 If the real interest rate on this security is high, 10%, the
opportunity cost (forgone interest earnings) of an investment
is high  Planned investment spending will then be low.
Because the firm would probably prefer to purchase the
security and earn the high 10% return than to invest in
physical capital.
 The real interest rate and the opportunity cost of investing
fall to 1%  planned investment spending will increase
Because investments in physical capital are likely to earn
greater income for the firm than the measly 1% the security
earns.


Planned Investment and Business Expectations
Keynes also believed that planned investment
spending is heavily influenced by business expectations
about the future.
Businesses that are optimistic about future profit
opportunities are willing to spend more, whereas
pessimistic businesses cut back their spending.
Thus Keynes posited a component of planned
investment spending he called autonomous investment,
I, that is completely exogenous and so is unexplained by
variables in his model, such as output or interest rates.


Investment Function
Describes how planned investment spending is

related to autonomous investment and the real interest
cost of borrowing

where d is a parameter reflecting how responsive investment
is to the real cost of borrowing, which is denoted by rc.


3. Net exports
Real Interest Rates and Net Exports
Real interest rates influence the amount of net exports through
the exchange rate
U.S. real interest rates rise  U.S. dollar assets earn higher
returns relative to foreign assets  People then want to hold mo
re dollars  they bid up the value of dollars and thereby increase
its value relative to other currencies.
A rise in the value of the dollar  U.S. exports more expensive
in foreign currencies  foreigners will buy less of them.
It also makes foreign goods less expensive in terms of dollars,
so U.S. imports will rise.


Autonomous Net Exports
The amount of exports is also affected by the demand by
foreigners for domestic goods
The amount of imports is affected by the demand by domestic
residents for foreign goods.
For example

The Chinese have a poor harvest
and want to buy more U.S. wheat

 U.S. exports will rise

U.S. consumers discover how
good Chilean wine is and want to
buy more
 U.S. imports will rise


Net Export Function
(7)

NX

: Autonomous Net Exports

x
:is a parameter that indicates how net exports
respond to the real interest rate

Net exports are positively related to autonomous net exports
and are negatively related to the level of real interest rates.


4. Government Purchases and Taxes
Government Purchases
Here we assume that government purchases are also exogenous
(8)

which says that government purchases are set at a fixed amount G.