ECO101H1 Lecture Notes - Lecture 6: Autonomous Consumption, Consumption Function, Price Level
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ECO101H1 Full Course Notes
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Ae (desired expenditure) = c + i + g + x m. Equilibrium is where actual expenditure = desired expenditure (y = ae) Ae comes from spending decisions of households, firms, gov and foreign markets. Total desired investment expenditure by all firms in the economy. Three main types of desired investment expenditure (excludes stocks ) For simplicity, consider planned investment function as autonomous (independent of national income) (graph of investment function) Planned investment =/= actual investment (affected by our demand of goods) If actual sales < planned sales: actual inventories > planned inventories -> firms respond by reducing production and vice versa. The simple model: inventories, residential construction, new plants and equipment. Depend on: interest rates (o. c. , changes in level of sales, expectations about future. Ae = c + i: c = c(autonomous) + mpcy, i = i (a) A: autonomous aggregate expenditure z: marginal propensity to spend in the economy (in simple model, just marginal propensity to consume)
