In this lecture we take another look at the consumption decisions of households and the investment decisions of firms. We also look at the interrelatedness of spending and labor supply decisions on the part of households. We will then apply these concepts to some relevant policy issues in the next two lectures. Upon completion of this lecture, you should understand and be able to answer these key questions:
1. How might a permanent tax cut lead to an economic recovery, but a temporary tax cut do very little for the economy?
2. How could people be worse off after a pay increase?
3. What determines how many workers firms decide to hire?
4. What is productivity and why does it rise and fall with economic fluctuations?
5. Will an increase in government spending really cause a big increase in GDP, as predicted by the government spending multiplier?