EC140 Lecture Notes - Lecture 4: Autonomous Consumption, Consumption Function

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10 Mar 2016

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If aggregate planned expenditure than real gdp (people trying to buy more stuf than companies producing), then inventories will fall, leading to irms increasing output. Companies increase output to get back up to levels of inventory desired by consumers. Idenify determinants of desired consumpion and investment: explain the diference between desired and actual expenditure notaion. 2: understand the meaning of equilibrium naional income, explain how a change in desired expenditure afects equilibrium income through the simple muliplier. People buy consumpion goods from disposable income, yd. All disposable income spent on consumpion or savings. Consumpion divided into autonomous (a) (amount you will spend regardless of income) and induced (b) (your choice to spend) components. *** mpc only considers consumpion and savings in this example, as that"s all individuals have to choose from in this model (no gov"t, no taxes, etc. ) Wide variety of factors can shit the consumpion funcion.

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On the planet Omicron Persei 8, government spending is $1000, net taxes are $1200, and planned investment is $1400. Consumers spend according to the equation C = 100 + 0.8Yd, where Yd represents disposable income. Given this information, fill out the table below to determine which of the output levels represents a macroeconomic equilibrium, then answer the questions that follow. Output (Income) Y Net Taxes T Disposable Income Yd Consumption C Planned Investment I Government Purchases G Planned Aggregate Expenditure AE Unplanned Inventory Change 6200 1200 5000 3850 1400 1000 6250 -50 6700 1200 5500 4225 1400 1000 6625 75 7200 1200 6000 4600 1400 1000 7000 200 7700 1200 6500 4975 1400 1000 7375 325 8200 1200 7000 5350 1400 1000 7750 450

An a. Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on inventory levels.

b. Is the government budget balanced, in deficit, or surplus, and by how much? Since the government is spending less than it is collecting in taxes, we are showing a surplus.

c. Find the marginal propensity to consume, and the marginal propensity to save. d. Find the government spending multiplier. If the government wanted to increase the equilibrium level of income by $1,000, how much would it have to increase government purchases? e. Find the tax multiplier. If net taxes were lowered by $100, what effect would it have on the equilibrium level of income? Give a specific numerical answer.

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EC140 Lecture Notes - Lecture 4: Autonomous Consumption, Consumption Function

EC140 Full Course Notes

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