ECO349H5 Lecture Notes - Lecture 6: Output Gap, Real Interest Rate, Consumption Function

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15 May 2017
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Mpc: marginal propensity to consume(mpc): c/ yd (cid:708)slope of consumption function(cid:709) Disposable income = consumption + savings: mps + mpc = 1. Shifts of the consumption function: a rise in household wealth shifts consumption up, a rise in interest rates shifts consumption function down, optimism leads to upward shift of consumption function. Higher the real interest rate, higher the opportunity cost of investment, lower the investment: changes in sales: Im = my, m is marginal propensity to import. Shifts in nx function: increase in foreign income shifts nx function up, increase in canadian (domestic) price, nx function will shift down and and be steeper. Government: increase purchase, reduce taxes, raise transfer payments to shift ae upward. Y>y*: inflationary gap reduce purchases, increase tax, reduce transfer payments to shift ae function downward. Unemployment leads to wage reductions and downward shifts of as that will (ultimately) close the gap. An inflationary gap occurs when y2 > y0.

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