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Lecture

# ECON 103 Lecture Notes

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University of Illinois

Economics

ECON 103

All

Fall

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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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