Lecture 29-Aggregate Demand and Aggregate Supply

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1 Aug 2010
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Tuesday, February 2nd, 2010.
Aggregate demand and Aggregate Supply
GDP Measures:
(1) National output
(2) National income
Question:
How is national income determined?
Answer:
Where desired spending -!FDOOHG³$JJUHJDWH([SHQGLWXUH´$(HTXDOVQDWLRQDOLQFRPH
(output)
Simple Model:
AE = C + I
C: planned (desired) consumption by households
I: planned (desired) investment by firms
Consumption
1. +RXVHKROGV¶FRQVXPSWLRQ&) depends upon income (Y)
Savings (S) = Income Not Consumed
2. Key Concepts
Marginal ± propensity ± to ± consume (mpc) = ¨&¨Y
Marginal ± propensity ± to ± VDYHPSV ¨6¨<
MPC + MPS = 1
Investment
1. Firms undertake investment (I) in anticipation of earning a profit
2. Will treat I as fixed (I = 25 in first example)
Example: Consumption Function
Y C S(=Y-C) ¨&¨< ¨6¨<
0 10 -10 - -
100 100 0 0.9 0.1
200 190 10 0.9 0.1
300 280 20 0.9 0.1
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Document Summary

Gdp measures: (1) national output (2) national income. Savings (s) = income not consumed: key concepts. Marginal  propensity  to  consume (mpc) = y. Investment: firms undertake investment (i) in anticipation of earning a profit, will treat i as fixed (i = 25 in first example) 0. 1 www. notesolution. com mpc = 0. 9 mpc = 0. 1. S = y  c = y  (10 + 0. 9y) Induced consumption (changes due to change in disposable income) Autonomous consumption (change not due to change in disposable income) N autonomous consumption = shift in consumption function. If there is no change in y, but c changes, result is change in autonomous consumption. vs. C = 10 + 0. 9y (1) autonomous consumption has increased by 10 (2) consumption function shift up by 10 www. notesolution. com. 7283;0892039: new plant and equipment, residential construction, inventories. Undesired (unplanned) fluctuations in inventory investment cause firms to change production. Undesired inventory investment (actual sales < planned sales)

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