ECN 204 Chapter Notes - Chapter 10: Real Interest Rate, Autarky, Fiscal Multiplier
6 Jun 2017
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Document Summary
Consumption and saving: primarily determined by disposable income (di, direct relationship. Consumption schedule (c: planned household spending (in our model) Saving schedule (s: di minus c, dissaving can occur. Like consumption, saving varies directly with the level of disposable income: as di rises, saving increases; as di falls, saving decreases. Mpc = change in consumption/ change in income. The real interest rate: i = nominal rate rate of inflation, crucial in making investment decisions. A change in spending changes real gdpmore than the initial change in spending. Multiplier = change in real gdp/initial change in spending. Change in gdp = multiplier x initial change in spending. Multiplier and mpc directly related: large mpc results in larger increases in spending. Multiplier and mps inversely related: large mps results in smaller increases in spending. Actual multiplier is lower than the model assumes. Humorous small town example of the multiplier. One person in town decides not to buy a product.
