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11 Pages

Quantitative Methods
Course Code
QMS 102
Amy Peng

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Note on the Final ExamSTUDENT STUMBLING BLOCKSThe following list is a summary from each lecture regarding the most difficult contentmaterialPlease review it If you have any questions please feel free to ask meLecture 5 and Lecture 6 up to slide 18Lecture 5 and 6 are very important it explains the basic aggregate expenditure model please review all of the slides and examples you must understand1AEY derive the shortrun equilibrium level of outputaAECI in the private closed economybY is measure by real GDPcIt is the point where the 45 degree line intercepts AE Function2The Consumption Function CC0cY which is a relationship between aggregate consumption spending and real income measure by real GDP and C0 is the autonomous expenditure c is the marginal propensity to consume3The Saving function SYC and SS0sY s is the marginal propensity to save and cs14The Investment function II gross investment spending is not a function of real GDP it is gdetermined by investment demand Investment demand and real interest rate is negatively relatedNote Review Lyryx Lab 5 5AECIC0cYIgC0IgcY note that AE function is also a linear function it relates the aggregate spending with real output measured by real GDP the intercept of the AE function is given by C0Ig which is also called autonomous expenditure the slope of the AE function is given by c the marginal propensity to consume6The equilibrium output is that output which creates total spending just sufficient to produce that output YAEaSaving equals planned investment SIbNo unplanned changes in inventoriescAEY YeC0Ig1c equilibrium output is equal to autonomous expenditure divided by 1MPC7The MultiplieraMultiplier11MPC1MPSb Multiplierchange in equilibrium outputchange in autonomous expenditurecMultiplierYAEeNote Review questions on Slide 17 and 18Lyryx lab 6 Question 1 and 2 Additional MC questions posted on blackboard under Connect quizzesLecture 7Lecture 7 is built on Lecture 5 and 6 By adding the government sector we add government spending G and taxes T into the AE equation1Adding government spending G is easy G is an autonomous term AECIG G shift AE up and increases equilibrium GDP2Adding tax T is tricky Tax doesnt affect AE directly taxes reduces disposable income and affect consumption function 3If tax is a lump sum tax T CC0c YT so CC0cTcY Tax reduces autonomous consumption Lower autonomous consumption shifts AE down and reduces equilibrium GDP4If tax isa Net Tax NTtY t is a net tax rate then CC0cYtY so CC0c1tY net tax rate reduces the slope of the consumption Net tax rate changes the slope of the consumption function and AE function it changes the multiplier multiplier1slope of AE11c1t so it reduces equilibrium GDPNote It is important to review the examples of lecture 7 especially slides 2528 to understand how G and T NT affect equilibrium GDPLecture 8Lecture 8 is about ADAS model
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