EC140 Lecture Notes - Lecture 21: Autonomous Consumption, Consumption Function, Macroeconomic Model
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Key variables: y, c, i, g, x, im. Variable with a subscript a- actual value: ca is actual expenditure on consumpion, ima is actual imports (desired imports) Variable without a subscript is the planned or desired amount: c id desired expenditure on consumpion, g is desired government expenditure. Gdp measured in expenditure is made up of: consumpion, 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- no trade, no government, and no taxes, constant prices. People buy consumpion goods from disposable income, yd. In a model with no government or taxes: yd = y. What households do not spend on consumpion is savings. Consumpion is assumed to increase with disposable income: c = a + b x yd. Consumers are assumed to have some exising savings.