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Western University
Economics 2152A/B
Ayoub Yousefi

Chapter 4 – Consumption, Saving, and Investment Aggregate Demand = C + I + G +Nx National Saving, S = Y – C –G Similarly, S = Y – C – G d: Desired d C = C +ocy Y (Keynesian Consumption Function) 0 < cy = MPC < 1 MPC: Marginal Propensity to consume E.g. MPC = .75 Factors that affect desired consumption 1. Wealth (increase), current consumption goes up, current saving goes down (assuming no change in y) 2. Expected future income(suppose it goes up), current consumption goes up, current saving goes down (assuming no change in y) e 3. Expected real interest rate (r = i – π ) - r: real (expected) rate of investment - i: nominal rate of interest e - π : expected (at the end of the year) rate of inflation - t: tax rate The expected after tax real rate of interest e r a-t = (1-t) i - π d d 4. Changes in r goa-tup (S goes up and C goes down  in order to consume more in the future inter-temporal substitution(substitution effect) d d - Investor feel more wealthy  S goes down and C goes up (income effect) d d - Empirically, though 1 > 2  as r goesa-t  S goes up and C goes down Fiscal Policy….Decisions about taxes and spending Fiscal policy that alters the tax burden on the private sector  change in household’s current and future d income  C Simply S = Y – C – G d 1) for any levels of Y and G (comparative static anal
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