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Lecture 29

Lecture 29-Aggregate Demand and Aggregate Supply


Department
Economics
Course Code
ECO102H1
Professor
Jack Carr
Lecture
29

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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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