5 Steps to a 5 AP Macroeconomics 2019

96 ❯ Step 4. Review the Knowledge You Need to Score High

•    With   the  exception  of   taxes  and  transfers, when    the  consumption    function    shifts  

upward, the saving function shifts downward.

•    With   the  exception  of   taxes  and  transfers, when    the  consumption    function    shifts  

downward, the saving function shifts upward.

•    When   taxes    increase   (or  transfers  decrease),  both     consumption    and  saving functions   shift   

downward.

•    When   taxes    decrease   (or  transfers  increase),  both     consumption    and  saving functions   shift   

upward.

8.2 Investment

Main Topics: Decision to Invest, Investment Demand, Investment and GDP, Market for

Loanable Funds

Investment is the other source of private domestic spending. We spend a little time exam-

ining why firms increase or decrease investment, build the investment demand curve, and

then introduce the market for loanable funds.

Decision to Invest

The decision of a firm to spend money on new machinery or construction is simply a deci-

sion based upon marginal benefits and marginal costs. The marginal benefit of an investment

Disposable

Income

Consumption

CHigh

CLow

C 0

Disposable

Income

Saving

0

S 0

SLow

SHigh

Figure 8.3

Figure 8.4

KEY IDEA