ECN 204 Lecture Notes - Lecture 3: Consumption Function, Demand Curve

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lilacgoat717

18 Oct 2016

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Written after the great depression: if aggregate expenditure (ae) is > then aggregate output (ao)/gdp = shortages, if ae is < ao = surpluses, if ae is equal than ao = equilibrium. Simple keynesian model: ae= c+i+g+(x-m: closed economy (no imports or exports, no government. ** look at formula we do not have g, x, or m therefore only using ae=c+i. Consumption is the function of income (income is always y in economics) Therefore c= f (y) called consumption function: there is a positive relationship between c & y, y=c+s. Same way of writing all of the above (s means savings) ****consumption can never be zero, even when y or gdp is zero theoretically. Marginal propensity to consume (mpc) (how much income changes by consumption) Mpc= change in c / change in y. Mps= change in s / change in y.

Related Questions

Assume that the equations below describe the expenditures within a particular macroeconomy and that these equations conform to the assumptions we've made in the lecture regarding the fixed price level Aggregate Expenditure model. All values for expenditure and income are dollar amounts, but for simplicity, we've dropped the $ below.

C = 0.8(DI) + 1000	C = Consumption expenditure, DI = Disposable Income
I = 2000	I = Investment expenditure
G = 1000	G = government expenditure
X = 1600	X = spending on exports
M = 1800	M = spending on imports
DI = Y - T	Y = real GDP, T = tax revenues/>
T = 1000
Yp = 12000	Yp = Potential GDP

Given the equations above, we can describe the GDP, government budget, and net exports in this economy. Select three characteristics from the list below which accurately describe this economy. Note that there is no partial credit on this question. I.e., your answer will either be all correct, or all wrong.

	a.	inflationary gap
	b.	recessionary gap
	c.	no output gap
	d.	government budget surplus
	e.	government budget deficit
	f.	balanced government budget
	g.	trade deficit
	h.	trade surplus
	i.	net exports of zero

pucearmadillo585

1. Given the following data, answer questions. Compute GDP, NDP, NI, and DI if PI is $740

NOTE: Use both the expenditure and the income approaches for # 1.

Personal taxes……………30 Gross private domestic investment………….145

Depreciation……………..40 Corporate income taxes………………………65

Transfer payments…….....35 Undistributed income………………………...45

U.S. exports……………..12 Compensation for employees……………….540

Dividends………………..37 Indirect business taxes……………………...105

Corporate profits……….147 Personal consumption expenditure…………630

Rents…………………….10 Social security contributions……………….110

Interest.. ……………… 38 Federal government purchases……………..140

U. S. imports……………..7 State & local government purchases………..50

Proprietors’ income……..90

2. Given the following data, compute GDP, NDP, and NI

Personal consumption expenditure………………….219.1

Personal taxes………………………………………...40.5

U.S. exports of goods & services…………………….17.8

Transfer payment…………………………………….13.9

Net private domestic investment……………………..42.1

Depreciation………………………………………….11.8

Government purchases……………………………….59.4

Rents………………………………………………......5.0

U.S. imports of goods & services…………………....20.5

Interest...……………………………………………...12.6

Indirect business taxes………………………………..16.6

3. Given the following income data, answer questions #1 and #2 properly.

Year C Ig G Xn GDP

1 $ 3971.62 $800.20 $1235.38 $ --20.00 = $_________

2 $ 5407.02 ------------ 1580.51 --40.36 = 8318.48

3 $ 5584.65 1390.52 -------------- 89.33 = 8708.44

a. Fill- in all the missing blanks.

b. How big/small is the size of C, G, and Ig out of Year2 GDP?

raspberrylizard757

5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for . Therefore, national saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = . Plugging this into the original equation showing the various components of GDP results in the following relationship: S = This is equivalent to S = , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing balanced trade. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to). Outcomes of Balanced Trade Imports Exports 0 Net Exports Y C+I+G Investment Saving Net Capital Outflow 0

ochreduck773

ECN 204 Lecture Notes - Lecture 3: Consumption Function, Demand Curve

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