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Chapter 21

ECON 295 Chapter 21: Chapter 21

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McGill University
Economics (Arts)
ECON 295
Mayssun El- Attar Vilalta

1. Macroeconomics policy – Chapter 21: The simplest short-run macro model Chapter overview - Desired aggregate expenditure  Desired consumption expenditure  Desired investment  Desired government expenditure  Desired net exports (desired exports minus desired imports) - Simplifying conditions  The price level, interest rates, and the exchange rate are fixed  The economy has no government (no net taxes and no government purchases)  The economy is closed (no foreign trade) - Induced expenditures: Components of aggregate expenditure that change in response to changes in national income - Marginal means that the concept involves some aspect of change - Consumption function: The relationship between disposable income and desired consumption - Marginal propensity to consume (MPC): The ratio of the change in desired consumption to a change in disposable income - Average propensity to consume (APC): Ratio of the consumption level to the level of actual national income - When consumption is known, saving is known - Marginal propensity to save: The slope of the saving function, measures the ratio of the change in saving to the change in national income - Average propensity to save: The ratio of the level of saving to the level of national income - Desired aggregate expenditure (AE): Determined by desired consumption and desired investment, depicted by an aggregate expenditure function - Equilibrium national income: Level of national income where desired aggregate expenditure equals actual national income - If desired aggregate expenditures doesn’t equal actual income, production will adjust eventually to create an equilibrium situation Hints and tips - Desired consumption depends on various variables, such as disposable income, the rate of interest, the level of wealth and consumers’ expectations - All the variables that determine consumption and investment expenditures also determine aggregate expenditure - AE = C + I  The equilibrium function is Y = C + I - The simple multiplier is equal to 1 over 1 minus the slope of the AE curve Multiple choice questions - Desired expenditure = what decision makers would like to spend with the resources at their command - Autonomous expenditures do not depend on national income - Consumption function: Describes the relation between desired real consumption expenditure and the fact
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