EC140 Lecture Notes - Lecture 5: Autonomous Consumption, Consumption Function, Macroeconomic Model
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EC140 Full Course Notes
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We start with a very simple model. Understand the basic mechanics of a macroeconomic model. Chapter 23- add changing prices after midterm 1. People buy consumption goods form disposable income yd. All disposable income spent on consumption or savings. Consumption divided into autonomous and induced components. C = a + b * yd. Wide variety of factors can shift the consumption function. Changes in household wealth, the distinction between wealth and income is important: wealth: value of investments go up (houses) If you reduce the interest rate, people tend to spend more and save less: get less (cid:373)o(cid:374)ey for each dollar they i(cid:374)vest, a(cid:374)d do(cid:374)"t have to pay as (cid:373)uch interest on loans. Expectations about the future: optimism: spend more, save less, pessimism: spend less, save more. For the simplest possible model- assume desired investment is autonomous expenditure. Firms decide first how much money they are going to invest (factories they build etc. )
