ECON 1110 Lecture Notes - Lecture 7: Autonomous Consumption, Consumption Function
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2 Feb 2016
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From our example: ae = 600 + 0. 9y. In equilibrium: y = 600 + 0. 9y, y 0. 9y = 600, 0. 1y = 600, y = 600 = equilibrium national income. If y < ae = inventories are falling (firms increase output) If y > ae = (firms reduce output) inventories are rising. Upward shift: increase in autonomous consumption. Optimistic: increase in future sales (expectation, decrease in autonomous consumption, decrease in future sales (expectations) Increase in b = steeper consumption and ae functions = rotate counter clockwise. In equilibrium: ae = c0 + i0 + by oy = ae oy = c0 + i0 + by o(1-b)y = c0 + i0 oy = [1/(1-b)][c0 + i0] From our example: ae = 600 + 0. 9y ob = 0. 9. Multiplier = 1/ (1-0. 9) = 10 (exam) increase 10 times in equilibrium. Example: c = 500 + 0. 75y + 0. 05w. I = 150 ofor every 1 unit increase in c0 and/or i0, national income will.
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