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Lecture

ECO101H1 Lecture Notes - Consumption Function, Autonomous Consumption, Parsec


Department
Economics
Course Code
ECO101H1
Professor
James Pesando

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Topic 17 t National Income and the Price Level
Jan 31st t Feb 7th
1. Overview
2. Simple Model
2.1 Consumption & Savings
2.2 Investment
2.3 National Income Determination
2.4 The Multiplier
2.5 Injections/Withdrawals
3. Extended Model
3.1 Government Spending and Taxes
3.2 Export and Imports
3.3 National Income Determination
3.4 The Multiplier
z Overview
Question: How is national income(synonymously national output)determined?
Answer: Where desired spending t called Aggregate Expenditure (AE) equals national income (output)
z Simple Model: AE=C+I
Assume price level is fixed (Î Nominal GDP = Real GDP) to simplify analysis:
Consumption (C)=planned (desired) consumption by households;
-- Households[ consumption (C) depends upon income (Y)
-- Savings (S) = Income Not Consumed = Y-C
-- Key Concepts:
Marginal-Propensity-to-Consume (mpc) = %¸C/%¸Y
Marginal-Propensity-to-Save (mps) = %¸S/%¸Y
mpc+mps=1. (For every dollar of the income is either saved or consumed;)
Investment (I)= planned (desired) investment by firms
-- Firms undertake investment (I) in anticipation of earning a profit;
-- Will treat as fixed (I=25) in First Example
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