Question

INSTRUCTIONS: DEFINE THE FOLLOWING TERMS AND CONCEPTS IN A CLEAR, CONCISE, AND EXPLICIT WAY. DEMONSTRATE THE RELATIONS BETWEEN THEM!

a) Nonresidential investment & inventory investment (including the way

they are financed).

b)Consumption & propensity to consume (including the way they are

financed).

Answer 1

(a)

Non-residential investment can be defined as the Expenditures by firms on capital for example, commercial real estate, tools, machinery, and factories.

Inventory investment can be defined as those items which are not sold in the current year but it is stored in the storage, raw materials and unfinished goods of the current year.

The Inventory investment depends on the non-residential investment because inventory investment is required for the production process and this is used by the capital (machinery) for the production of goods. So as the non-residential investment increases the quantity of inventory investment increases because inventory investment is used as the inputs for the production process.

(b)

Consumption can be defined as the goods and services which an individual uses for satisfying his needs. His consumption level depends on the income as well as his wealth or saving.

Consumption= a+bY

a is autonomous consumption

b is MPC

Y is Income

Marginal propensity to consume (MPC) can be defined as the effect of a change in the income on the change in the consumption.

MPC=C/ Y

It means as the MPC increase the consumption level also increases.