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Lecture 4

ECON1002 Lecture Notes - Lecture 4: Potential Output, Consumption Function, Root Mean SquarePremium

8 pages77 viewsSpring 2017

Department
Economics
Course Code
ECON1002
Professor
All
Lecture
4

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Wednesday, 23 August 2017
ECON1002 - Lecture 4 (Week 4)
Aggregate Expenditure (AE)!
-AE = C + I + G + NX!
-We are in the short run so prices and interest rates etc. are constant.!
-Output is determined by planned aggregate expenditure:!
Actual I > planned I then inventories rise. !
Actual I < planned I then inventories fall. !
-However, for everyone else we assume that actual spending is the same as
planned spending to allow us to show that occasionally firms make mistakes with
their investment planning. !
The Consumption Function!
-Where:!
Cc = exogenous consumption (wealth eect)!
C = marginal propensity to consume (0 < MPC < 1)!
Y = total income !
T = net taxes!
1
C
Y-T
c
C
( )
where
exogenous consumption (wealth effect)
marginal propensity to consume (0<MPC<1)
total income/production
net taxes
C C c Y T
C
c
Y
T
= +
=
=
=
=
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C C cY= +
( )
1S C c Y=+
PAE
Y
45°
C
Ip
Household planned
consumption
Firms’ planned
investment
PAE
Equilibrium
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