AS.180.101 Lecture Notes - Lecture 6: Disinflation, Consumption Function
Document Summary
Even when recently fired or unemployed, consumers will have essential purchases. Need to pay for car, house, food. Which is why consumption function still applies to zero income. Adding planned investment and government purchases to ae model. Four lines consumption increasing as each factor (c, i, g, nx) is added. Inflation: the overall price level and its rate of change. The overall price level is an index of a comprehensive basket of goods and services. The inflation rate is the speed with which the overall price level is changing. A rapidly rising price level, hyperinflation, is very destabilizing. A rapidly falling price level, deflation, is very destabilizing: mortgages have fixed interest rates, so when income goes down housing payments don"t. This is one of the largest problems in. We use a price index to separate price changes from output shifts. We use a price index to guard against accelerating inflation pressures.