Lecture Notes for Oct 21, 2008 Chapter 11

Chapter 1 Business Cycle Alternating periods of economic expansion and economic recession. Why is economy more stable? The increasing importance of services. The establishment of unemployment insurance and other government transfer programs that provide funds to the unemployed. Active federal government policies to stablize the economy. The Aggregate Expenditure Model A macroeconomic model that focuses on the relationship total spending and real GDP, assuming that price level is constant. AE=C+I+G+NX ? Consumption(C) ? Planned investment(I) ? Government Purchases ? Net Export Determining the level of aggregate expenditure in the economy Consumption: Current disposable income The most important determinant of consumption is the current disposable income. Household wealth A household wealth is the value of its assets minus the value of its liabilities. Expected future income The price level The price level measures the average prices of goods and services in the economy. The interest rate Consumption Function The relationship between consumption spending and disposable income. Marginal propensity to consume The slope of the consumption function: The amount by which the consumption spending changes when the disposable income changes. MPC=Change in consumption/change in disposable income Marginal propensity to save(MPS) The change in saving divided by the change in disposable income. MPC+MPS=1