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ECON 103 Lecture Notes

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University of Illinois
ECON 103

GDP = total goods and services for the annual year . Nominal is calculated at current market prices . real includes inflation National income = sum of all factor incomes GDP > NI GDP = I + C + G + X Substitute goods: goods that can be substituted for exactly the same Complimentary goods: goods that go along with that one, buns for hotdogs Inferior goods: goods that increase in sales as price increases for a normal good GDP – depreciation = net DP Net DP – indirect tax = national income National income – direct tax + transfer payment = disposable income Transfer payment is pension Price index calculates the inflation Average Propensity to consume: consumption / income or 1-APS Average Propensity to save: 1- APC = APS Marginal Propensity to consume: % of change in income consumed (National) Income (y) = consumption (c) + investment (i) + Government (g) Y-C = Savings (s) I=s All consumed on line. But income graphed with consumption gives you consumption curve C curve has poor nations on left and rich on right such that makes more, spends more This line is of a person that spends equal amounts made, such that the point (2,2) lives on it. Slope changes with more consumption or less consumption to income ratio Recessionary Gap AS >AD Intersection C = amount consumed by economy. Intersection C + I = amount consumed and invested From C + I to 45 line, products made not sold, lay off workers and decrease production. Lowers AS to AD which is at the point where C + I = 45 degrees such that as much is made as sold This is not full employment so govt may subsidize or lower taxes on companies to increase employment From C+ I to 45 would be a recessionary gap Inflationary Gap, where AD > AS Fiscal Policy: Govt influencing level of economic activity by increasing/decreasing taxes increasing/decreasing spending. Recessionary: decrease tax and/or increase spending, shifts AD forward, (more income, so C shifts up) Inflationary: increase tax and/or decrease spending, shifts AD back (less income, so C shifts down) Monetary Policy: Fed reserve sells and buys bonds to banks. This either increases or decreases the money supply. More $ lower interest rate, less $ higher interest rates High interest rates lower loanable funds, lower interest rates raise loanable funds More funds = more AD 10 B spent, and MPC is .5, so then for every iteration ½ of money is used again. So 10 + 5 +2.5… 10 B spent, MPC is .8, so for every iteration .8 of the money is .8 of the last. 10, .8, 6.4 …. 1/MPS = multiplier Multiplier X initial = total effect on economy C = 500 +.5Y I=G=50 .5 is the MPC 500 = Y intercept Finding Y at equilibrium AD = AS w
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