39-E Stuvia-67aboratio06xam (elECS 1601ns) ecs1601-assignment-3-semester-1-en-2-2021.pdf

: Prescribed book PG 277 Although production, income and spending all occur simultaneously, it is useful to consider these three flows in sequence, starting with production. Production creates income which is then used to purchase the products that were produced in the first place. By definition, income is always equal to production but there is no guarantee that all income will be spent. Spending may be equal to, greater than or less than income. 2. 4 Reference: Prescribed book PG 318 As income increases, consumption increases, but the increase in consumption is smaller than the increase in income. 3. 3 Reference: Prescribed book PG 313 Closed economy with or without Government: The SKM assumes a closed economy (i.e. without foreign trade) with or without Government. Constant prices: In stark contrast to the quantity theory model, the SKM assumes an exogenously fixed price level. 4. 4 Induced consumption, on the other hand, differs in that the amount of consumption varies based on income. As disposable income rises, so does the rate of induced consumption. 1 This process applies to all normal goods and services. ... As the value of disposable income rises, it induces a similar rise in consumption. 5. 1 Reference: Prescribed book PG 322 Why do firms purchase capital goods? In other words, why do they invest? The answer is simple – firms invest because they hope to earn profits. They estimate the cost of the capital goods concerned (eg buildings, machinery, equipment) and compare these costs to the amounts they expect to earn from the investment. The greater the expected profit, the greater investment will tend to be. If no profit is expected, there will be no investment. 6. 1 Reference: Prescribed book PG 328 The multiplier effect is the magnified increase in equilibrium GDP that occurs when any component of aggregate expenditures changes. The greater the MPC (the smaller the MPS), the greater the multiplier 7. 2 Households will consume R70 if their disposable income is zero and will consume 0,65 of any increase in disposable income they receive. Downloaded by: danellehorn | Distribution of this document is illegal This study source was downloaded by from CourseH on :40:55 GMT -05:00 This study resource was share