MGEA06H3 Lecture Notes - Lecture 10: Interest Rate, Inventory Investment, Consumption Function

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

Document Summary

Derive the consumption function and investment function. Develop the income-expenditure model (aggregate expenditure model). Describe the adjustment process and the comparative static under the income-expenditure (or aggregate expenditure) model. Macroeconomics is not just simply adding things up; we need to consider the interactions of different sectors. The income-expenditure model is a simple model of output determination. The model examines the chain reaction of an initial change in autonomous expenditure on output so that we can explain the business cycles. The income-expenditure model shows that the ultimate change in output (y) due to a change in autonomous expenditure (ae0) is: Y = m ae0, where m = the multiplier. The multiplier (m) measures the change in equilibrium output/income that results from a unit change in autonomous expenditure, i. e. , We will now develop the income-expenditure model so that we can discuss how changes in autonomous expenditure affect output. Assumptions of the income-expenditure model (in the meantime)