EC140 Lecture Notes - Lecture 4: Autonomous Consumption, Macroeconomic Model, Expenditure Function
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Key variables are y, c, i, g, x, and im. Variable with a subscript a means actual value. Variable without a subscript is the planned or desired amount. Gdp measured in expenditure is made up of: consumption, investment, government purchases, net exports, ae = c + i + g + (x-im) Autonomous expenditure does not change when income changes. Understand the basic mechanics of a macroeconomic model: closed economy means no trade, no government and no taxes, constant prices. Yd = y in a model with no government or taxes. Consumption is assumed to increase with disposable income: c = a + b * yd. Consumers are assumed to have some existing savings. Consumers would have some consumption spending even if income were zero. Equals a in our desired consumption equation. People spend more on consumption as income rises. Average propensity to consume is apc: apc = c/yd. Marginal propensity to consume is mpc: mpc = c/yd.