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Chapter 27.doc

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ECON 1010
Steven Edwards

Chapter 27 Fixed Prices and Expenditure Plans • Each firms prices are fixed for the conomy as a whole , : • 1. The price level is fixed • 2. Aggregates demand determines the real GDP Expenditure Plans • aggregate expenditure has 4 parts : • consumption, expindure, investmennt and governemtn expenditure on goods and services and net exports • Aggregate planned expenditure is equal to the sum of pllaned levels of consumption expenditure • consumption expenditure and imports change when income changes so they depend on real GDP Two Way Link Between Aggregate Expenditure and Real GDP • An increase in real GDP increases aggregate expenditure • and an increase in aggregate expenditure increases real GDP Consumption and saving plan • Influence consumption expendutre and svaing plans many factors • 1.Disposable Income • 2.Real Intrest Rate • 3. Wealth • 4.Expected future income • Disposable income is aggregate income minus taxes plus transfer payment agg income equals real GDP so disposable income depends on Real GDp Consumption Expenditure and Saving • households can only spend their dispos income on consumption or save it so planned consumption expenditure plus pllaned alwasy equal dispos income • realationship between consumption expenditure and disposable income is the consumption function Consumption Function • as disposable income increases so does conomsuption expenditure • autonomous consumption : is the amount of consumption expendtiture taht would take place in the short run even if ppl had not current income • induced consumption which the consumption expenditure that is induced by an increase in disposable income • 45 degree line meansyre dispo income • saving function - Marginal Propensities to consume and Save • The Marginal Propensity to consume is the fraction of change in disposable inceom that is spent on consumption change in consumption expendtiture diveded by disposable cinome • CE/DI Marginal Propensity to save MPS • change in savings divided by disposbale income • Change in saving/ disposable income Slopes and Marginal Prospensities • consumption function is the marginal prospeensity to consume and the slope of the saving function is the marginal pro
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