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- Test 3 Aggregate Expenditures Lecture 17-18

Kailtyn v.

Keynesian Economics

SRAS prices fixed. So AS curve is horizontal. AD is more important than AS. Where AS and AD curve meet is the real level of GDP. So as AD shifts on the AS supply curve, the real gdp level will more in the same direction.

Multiplier Effect on Keynesian model

Like an L rotate CCW 90degrees. If unemployment is 0%, we can keep increasing real gdp but we'll get a CAPACITY constraint and increase less and less and less.

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Excess Capacity

be at low levels of real GDP

(In)voluntary unemployment

Involuntary: want to work but can't

Voluntary: want to work, but not at current prices

Increase demand for labour to decreases unemployment

Voluntary: want to work, but not at current prices

Increase demand for labour to decreases unemployment

AD=

C+I+G+NX

Can do 3 things with income in households

pay taxes

consume

save

consume

save

Yd = disposable income

Income after taxes

Yd = Consumption + Savings

Yd=C+S

So C = YD-S

Yd = Consumption + Savings

Yd=C+S

So C = YD-S

Consumption function

C = a +mpcYd

a= autonomous consumption = y-intercept

mpc = marginal propensity to consume = slope

a= autonomous consumption = y-intercept

mpc = marginal propensity to consume = slope

Autonomous Consumption

Consumption that is independent of income.

Wealth we spend when our income is 0.

Wealth we spend when our income is 0.

MPC has to be a number...

less than 1

MPC

* The additional consumption expenditure that results from a ONE UNIT INCREASE in disposable income.

* MPC = change in c / change in Yd

* If given 1$, MPC says how much of that dollar you will CONSUME.

* MPC = change in c / change in Yd

* If given 1$, MPC says how much of that dollar you will CONSUME.

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Savings Function

S = -a + mpsYd

a=dissaving

MPS = (1-MPC)

a=dissaving

MPS = (1-MPC)

If MPS goes up, then MPC goes...

down!

APC

Average propensity to consume

Consumption / Yd

APC starts higher than the MPC and then converges down to it.

Consumption / Yd

APC starts higher than the MPC and then converges down to it.

APS

Average propensity to save

Savings / Yd

APS starts negative and rises to MPS

Savings / Yd

APS starts negative and rises to MPS

Changes in Yd cause a ___________ consumption function

movement along the

NOT a shift in!!!!

NOT a shift in!!!!

Determinants of Consumption (chase SHIFTS in consumption function) (C)*

* wealth (^, then C ^)

* expectations (^, then C ^) {confident animal spirits}

* demographics {Population up, then a increases (y-intercept), but if population MIX is different/up, then it can change the MPC (slope)}

* expectations (^, then C ^) {confident animal spirits}

* demographics {Population up, then a increases (y-intercept), but if population MIX is different/up, then it can change the MPC (slope)}

Investment (I)*

Does not vary with income. Investment is like...firm spending on capital goods (equipment, machines, software, etc).

Is a straight horizontal line on a graph (just by itself, since it's a single number like... I=50, or I=80).

Is a straight horizontal line on a graph (just by itself, since it's a single number like... I=50, or I=80).

Determinants of Investment (causes it to change)

* Interest rate (^, I v)

* technology (^, I^)

* capacity utilization (^, I ^)

* expectations (^, I^)

* technology (^, I^)

* capacity utilization (^, I ^)

* expectations (^, I^)

Government Spending (G)*

Not to vary with income.

Is a constant. EX: G=70, or G=140

Is a constant. EX: G=70, or G=140

Determinant of Govt Spending

Policy (govt policy)

Net Exports (NX)

(X-M)

Exports are INDEPENDENT) of domestic real gdp (Y)

Exports depends on circumstances in foreign countries.

Imports DO VARY with domestic real GDP (Y)

M is largely determined by health of our economy.

DETERMINANTS OF M: tastes, exchange rate, price of foreign goods, govt policy, price of domestic goods

Exports are INDEPENDENT) of domestic real gdp (Y)

Exports depends on circumstances in foreign countries.

Imports DO VARY with domestic real GDP (Y)

M is largely determined by health of our economy.

DETERMINANTS OF M: tastes, exchange rate, price of foreign goods, govt policy, price of domestic goods

Exports (X)

Autonomous with respect to income (income doesn't affect it)

Is a constant, like X=50, or X=50030

Is a constant, like X=50, or X=50030

Import Function

Like consumption function but for FOREIGN GOODS.

M = autonomous imports + marginal propensity to import(Yd)

M= m0+m1Yd

M = autonomous imports + marginal propensity to import(Yd)

M= m0+m1Yd

Marginal Propensity to Import

MPI = change in M / Change in Yd

= change in imports / change in disposable income

Ex: MPI = 0.1, Then is Yd increases by 1$, imports will rise by 0.10$.

= change in imports / change in disposable income

Ex: MPI = 0.1, Then is Yd increases by 1$, imports will rise by 0.10$.

As Yd up, Nx goes....

DOWN.

And as YD goes down, Nx goes UP.

As Yd increases, our exports fall, and we're importing more.

If Yd falls, we import less but still export the same.

And as YD goes down, Nx goes UP.

As Yd increases, our exports fall, and we're importing more.

If Yd falls, we import less but still export the same.

On the Net Exports curve

The line that crosses the X access is our equilibrium income point. Any point below that line, we'll have a trade SURPLUS. and any point above that line is a trade DEFICIT.

AE

C+I+G+X-M

When finally solve for AE = 200+0.6Yd for example, then if Yd goes up by 1$, AE will go up by 0.6!

AE has a shallower slope than the consumption function's slope (shallower slope than the MPC)

When finally solve for AE = 200+0.6Yd for example, then if Yd goes up by 1$, AE will go up by 0.6!

AE has a shallower slope than the consumption function's slope (shallower slope than the MPC)

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