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Chapter 8

Chapter 8 and 9

8 Pages
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Department
Economics
Course Code
ECN 204
Professor
Amy Peng

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Chapter 8 and 9.1; 9.2
Aggregate Expenditures Model
Aggregate expenditures (AE): Total planned spending on final goods and
services
oFour components
oConsumer expenditure (C)
oInvestment (I)
oGovernment purchases (G)
oNet exports (NX)
Income-Consumption and Income-Saving Relationships
45 line: A reference line indicating where consumption equals disposable
income. (C=DI)
Consumption Schedule: A schedule showing the amounts households plan to
spend for consumer goods at different levels of disposable income.
Saving schedule: A schedule that shows the amounts households plan to save
at different levels of disposable income. (S = DI C)
oGap in between the 45 line and the Consumption schedule
Break even income: the level of disposable income at which households plan
to consume all their income and to save none of it
oWhere Consumption schedule intersects with 45 line
Consumption function
Saving function
Marginal propensity to consume: The fraction of any change in disposable
income spent for consumer goods.
Marginal propensity to save : The fraction of any change in disposable income
that households save
Non income determinants of Consumption and Savings
oWealthoExpectations
www.notesolution.com
oReal Interest Rates
oHousehold Debt
oTaxation
oBorrowing
www.notesolution.com
The interest Rate-Investment Relationship
Expected rate of return(r) : The increase in profit a firm anticipates it will
obtain by purchasing capital.
Real interest rate
oRate of return > interest rate = profit
oRate of return < interest rate = loss
oTo find interest:
Investment demand curve: A curve that shows the amount of investment
demanded by an economy at a series of real interest rates
Shifts in the investment demand Curve
Determinants:
oAcquisition, Maintenance and Operating Costs
oBusiness Taxes
oTechnological Change
oStock of Capital Goods on Hand
oPlanned inventory
oExpectations
Fluctuations
oDurability
oIrregularity of innovation
oVariability of profits
oVariability of expectations
Determination of the Equilibrium levels of Employment, Output and
Income
Investment schedule (gross investment Ig) = A curve or schedule that shows
the amounts firms plan to invest at various possible values of real GDP
Aggregate expenditure
Unplanned changes in inventory: changes in inventories that firms did not
anticipate
Equilibrium arises when savings = Gross investment
www.notesolution.com

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Description
Chapter 8 and 9.1; 9.2 Aggregate Expenditures Model Aggregate expenditures (AE): Total planned spending on final goods and services o Four components o Consumer expenditure (C) o Investment (I) o Government purchases (G) o Net exports (NX) Income-Consumption and Income-Saving Relationships 45 line: A reference line indicating where consumption equals disposable income. (C=DI) Consumption Schedule: A schedule showing the amounts households plan to spend for consumer goods at different levels of disposable income. Saving schedule: A schedule that shows the amounts households plan to save at different levels of disposable income. (S = DI C) o Gap in between the 45 line and the Consumption schedule Break even income: the level of disposable income at which households plan to consume all their income and to save none of it o Where Consumption schedule intersects with 45 line Consumption function Saving function Marginal propensity to consume: The fraction of any change in disposable income spent for consumer goods. Marginal propensity to save : The fraction of any change in disposable income that households save Non income determinants of Consumption and Savings o Wealth o Expectations www.notesolution.com
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