EC140 Lecture 3: EC140 - Lecture 3
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Gdp measured in expenditure is made up of: Net exports: ae = c + i + g + (x-im) demand driven model. Autonomous expenditure does not change when income changes. Per capita consumption and disposable income move broadly together over time. Consumption is assumed to increase with disposable income: c = a + b * yd. Consumers are assumed to have some existing savings. Even if income were zero, consumers would have some consumption spending. Equals a in our desired consumption equation. As income rises, people spend more on consumption. Equals b in our desired consumption equation. Average propensity to consume (apc: apc = c/yd. Marginal propensity to consume (mpc: mpc = deltac/deltayd. Equals b in our desired consumption equation: c = a + b*yd. 45 degree line shows where c = yd (equilibrium) In a model with no government or taxes, yd = y. People buy consumption goods from disposable income, yd.