March 21, 2018 

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FEDERAL DEFICIT: An excess of federal government spending over tax collections. The federal deficit has been the subject of on-again, off-again debates among vote-seeking politicians and pointy-headed economists for a number of years. The main points of the debate are: (1) the potential crowding out of investment in capital goods, (2) the use of borrowed funds for either "consumption" or "investment" government purchases, and (3) the constraints imposed on fiscal policy. The jury of pointy-heads remains undecided on these issues.

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Lesson 12: Business Cycles | Unit 4: Causes Page: 18 of 26

Topic: Investment <=PAGE BACK | PAGE NEXT=>

Instability of business investment is one explanation of business cycles.
  • During the Great Depression, production declined by 40% and investment declined by over 90%. Did this big drop in investment cause the overall drop in production?
  • Investment can trigger changes in production through the circular flow. A decrease in investment, causes a decrease in production, which reduces household income, which reduces consumption, which causes further reductions in production, income, and consumption.
  • Small changes in investment can cause magnified changes in aggregate production. A $10 billion decrease in investment might cause a $50 billion decrease in GDP.

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Whether or not the consumption of a particular good by one person prevents simultaneous consumption by another person. In other words, does consumption impose an opportunity cost on others. Rival consumption occurs if the consumption by one imposes an opportunity cost on others because others are prevented from consuming the good. Nonrival consumption occurs if the consumption by one does not impose an opportunity cost on others because others are not prevented from consuming the good. When combined with nonpayer excludability, the result is four alternative types of goods -- private, public, common-property, and near-public.

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Today, you are likely to spend a great deal of time looking for a downtown retail store trying to buy either an AC adapter for your CD player or storage boxes for your family photos. Be on the lookout for rusty deck screws.
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