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Gregory Mankiw
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CHAPTE
R
18
Investment
Modified for EC 204
by Bob Murphy
2010 Worth Publishers, all rights reserved
SEVENTH EDITIO
MACROECONOMICS
Residential investment:
purchases of new housing units
(either by occupants or landlords).
Inventory investment:
the value of the change in inventories
of finished goods, materials and supplies,
and work in progress.
CHAPTER 18
Investment
Total investment
Business fixed investment
Residential investment
Change in inventories
CHAPTER 18
Investment
In this context,
investment is the rental firms
spending on new capital goods.
CHAPTER 18
Investment
real rental
price, R/P
CHAPTER 18
Investment
capital
supply
capital
demand
(MPK)
K
capital
stock
7
Investment
CHAPTER 18
Investment
Investment
10
$1000
$2000
$600
$2400
11
Investment
12
CHAPTER 18
Investment
13
CHAPTER 18
Investment
14
An increase in r :
raises the cost
of capital
reduces the
profit rate
and reduces
investment:
r2
r1
I2
CHAPTER 18
Investment
I1
I
15
An increase in MPK
or decrease in PK/P
increases the
profit rate
increases
investment at any
given interest rate
shifts I curve to
the right.
CHAPTER 18
Investment
r1
I1
I2
I
16
CHAPTER 18
Investment
17
Investment
18
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Investment
19
Tobins q
Investment
20
Investment
21
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Investment
22
CHAPTER 18
Investment
23
CHAPTER 18
Investment
24
Percent
change
from
1 year
earlier
Investment
26
Investment
27
CHAPTER 18
Investment
28
Financing constraints
Neoclassical theory assumes firms can borrow to
buy capital whenever doing so is profitable.
Investment
29
Residential investment
The flow of new residential investment, IH ,
depends on the relative price of housing PH /P.
CHAPTER 18
Investment
30
Supply
Supply and
and demand
demand for
for
houses
houses determines
determines the
the
equilib.
equilib. price
price of
of houses.
houses.
Demand
KH
Stock of
housing capital
CHAPTER 18
Investment
The
The equilibrium
equilibrium price
price of
of
houses
houses then
then determines
determines
residential
residential investment:
investment:
31
Demand
KH
Stock of
housing capital
CHAPTER 18
Investment
IH
Flow of residential
investment
32
Demand
KH
Stock of
housing capital
CHAPTER 18
Investment
IH
Flow of residential
investment
33
Housing prices
(left scale)
Housing starts
(right scale)
Inventory investment
CHAPTER 18
Investment
35
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Investment
36
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Investment
37
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Investment
38
CHAPTER 18
Investment
39
CHAPTER 18
Investment
40
Investment
41
Chapter Summary
1. All types of investment depend negatively on the
real interest rate.
2. Things that shift the investment function:
Chapter Summary
3. Investment is the most volatile component of
GDP over the business cycle.