MGEA06H3 Lecture Notes - Lecture 5: Permanent Income Hypothesis, Autonomous Consumption, Inventory Investment

• School: UTSC
• Department: Economics for Management Studies
• Course: MGEA06H3
• Professor: Iris Au

Document Summary

Income-expenditure model is a simple model of output determination, which examines the chain reactions of an initial change in autonomous expenditure (ae0) on output so that we can explain the business cycles. Autonomous expenditure is the desired level of spending by households, firms, or government that is not affected by the level of real gdp. Income-expenditure model shows that the ultimate change in output (y) for a given change in autonomous expenditure (ae0) is: The multiplier (m) measures the change in equilibrium output/income that results from a unit change in autonomous expenditure, ex) Producers willing to supply additional output at a fixed price -> change in aggregate expenditure leads to change in aggregate output (real gdp) Gov. spending, taxes, & transfers are given where t = lump-sum taxes & tr = lump-sum transfers. Exports & imports are given, x = x0 (autonomous exports) & im = im0 (autonomous imports)