ECON 209 Lecture Notes - Lecture 6: Consumption Function, Aggregate Demand

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11 Feb 2016

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It relates to the desired aggregate expenditure to actual national income. Here, the word actually means that the national income is adjusted for in ation. Aggregate expenditure is a measure of national income. It is the current value of services and goods in the economy. Hence, i tis the sum total of all the expenditures carried out in the economy over a speci c time period. Ae=c+i; this is in absence of the government and international trade. Note: the number 0. 8 is mpc (marginal propensity to consume) additional income that an individual consumes. Here, it means that for every , an individual will spend 80 cents and save. If the desired aggregate expenditure exceeds actual output: inventories decrease there is market pressure for output to rise.

Related Questions

The following is a model of a closed economy with nogovernment.
C = 44 + 0.6YD I = 12

where C = desired consumption expenditure (in billions of $), YD =disposable
income (in billions of $), and I = desired investment expenditure(in billions
of $).

a) What is autonomous C equal to?
b) What is induced C equal to if national income (Y) is 120?
c) What would happen to C if Y increased by 10?
d) What is the saving function equal to?
e) How can private saving (S) be negative? Explain.
f) What would happen to S if Y increased by 10?
g) At what level of Y is the average propensity to consume (APC)equal to 1?
h) How does the APC change as Y increases?
i) How does the average propensity to save (APS) change as Yincreases?
j) What is aggregate expenditure function equal to?
k) Is the economy in equilibrium when Y is 150? If no, then by howmuch are
the economyâs inventories changing?
l) What are the equilibrium levels of Y, C, S, and YD?
m) At equilibrium, what do the injections and the withdrawals inthis
economy equal?
n) Give two reasons why investment would change from I = 12 to I =18.
o) What are the new equilibrium levels of Y, C, S, and YD ifinvestment
changed from I = 12 to I = 18?
p) What is the size of the (simple) multiplier?
q) What is the change in Y in the 3rd round of the multipliereffect as a
result of the change in investment in part n?

harlequinseal728

In the country of Utopia, the structure of the economy is described as the following:

Y = C + I + G + (X â M)

C = C0 + (mpc)(DI)

I = I0 + (mpi)(Y)

M = M0 + (mpm)(DI)

DI = Y â T

T = (t)(Y)

Where Y is the level of real GDP in the economy, DI denotes the disposable income in the economy, C represents the level of consumption in the economy, C0 is the autonomous consumption level, mpc denotes the marginal propensity to consume, I is the level of investment in the economy, I0 characterizes the autonomous investment, mpi is the marginal propensity to invest, G characterizes the level of government expenditure, X is the level of export from the country, M represents the amount of import in the country, M0 is the level of autonomous import, mpm denotes the marginal propensity to import, T is the amount of tax imposed in the country, and t represents the average tax rate in the economy.

After extensive research, the economists in Utopia believe that the following values (all the dollar values are in number of millions) can be assigned to the structure of the economy, C0 = $500; mpc = 0.8; I0 = $200; mpi = 0.2; G = $400; X = $300; M0 = $100; mpm = 0.1; and t = 0.25. The Utopian economists further believe that the level of potential GDP in the country is $4,000.

Questions:

1. What is the demand side equilibrium level of real GDP in the country? Please show your calculations.

2. Is the overall Utopian economy in equilibrium? Elaborate your answer.

3. If the economy is not in equilibrium, what will happen eventually? Explain your answer.

4. What is the value of the overall multiplier? Please show your calculations and explain the value.

The country of Utopia is probably experiencing a recessionary pressure in its economy now. The economists are suspecting that, since the latest estimates of mpc, mpi, and mpm indicate that their estimated values have gone down to 0.65, 0.15, and 0.05 respectively.

5. What is the demand side equilibrium level of real GDP in the country now? Please show your calculations.

6. Is the overall Utopian economy now in equilibrium? Elaborate your answer.

7. If the economy is not in equilibrium now, what will happen eventually? Explain your answer.

8. What is the adjusted value of the overall multiplier? Please show your calculations and explain the value.

Assume the following values of an economy.

Planned Investment (Ip) = $20

Autonomous Consumption (C ) = $30

Marginal Propensity to consume (MPC) = .9

What is the equilibrium income?

Y* = aggregate demand at the equilibrium level. (Consumption + investment)

Consumption function = autonomous consumption + mpc * Y.

C=30 + .9Y

AD = 30 + .9Y + 20 = 50 + .9Y

Y= 50 + .9Y.1Y = 50

Y = $500 is the equilibrium level of income.

What is the value of saving at equilibrium?

Savings = income - consumption at the equilibrium level of Y=500,

Consumption = 30 +.9 * 500 = $480

Savings = 500 - 480= 20

c. Does the saving and Investment Identity hold true at equilibrium income OR GDP?

Since planned investment = $20 which is equal to savings calculated, the saving investment identity holds true at equilibrium income.

2. In addition to the values given in question (1) above, assume the government increases its spending by $30 without raising taxes. The government can do this by borrowing from the private sector.

a. Based on this information calculate the new level of equilibrium income.

If Government expenditures = $30, Y = C + I + G

Y = 1/1-.09 * (30+20+30) Y = 800

b. Calculate the total value of consumption at equilibrium.

C = 30 + .9(800) = 750

c. Calculate the total value of saving at equilibrium.

Savings = I - C = 800 - 750 = 50

3. In addition to questions in (1 & 2) above, assume the government decides to raise autonomous taxes by $30 to balance its budget.

What is the new value of equilibrium income?

Y = 1/1-.9 (30-.9(30) +20+30) = 530

What is the value of the autonomous tax multiplier?

-.09/.01 = -9

c. What is the value of autonomous spending multiplier?

1/.1 = 10

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ECON 209 Lecture Notes - Lecture 6: Consumption Function, Aggregate Demand

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