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handout7 - Elements of Macroeconomics Handout#7*Consumption...

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Unformatted text preview: Elements of Macroeconomics Handout #7 *Consumption Function Real Consumption Expenditure depends on: - Real (Disposable) Income OTE: T Real Income :> T Consumption Expenditure . Real Wealth OTE: T Real Wealth :> T Consumption Expenditure - OTE means "Other Things Equal" *Consumption Function A C=CY,—— ( P) C=E+bY+y—A— P O<b<l 7>O *Marginal Propensities to Consume AC . b = MPCY = 1—1;: Measures Sensitivity of C to Y - y = MPCA 2 Ag: Measures Sensitivity of C to i '13 A}: P P E+y~4°—+b_r1: lope C=5+bY+yiAi Pa 01 o W Effective C Intercept *A Decrease in PO *Interpretation A0 Po :> T C for a given Y J1 Po :> T :> T Intercept of Con. Fn. *Zoai fimmqmmmfim mxcmsachm “\Hm mum: NHQ+N HN+SN+RW9+M . o QHm+®M\+m\l\Alo. HN+VMp+M+wN . w my m5? 0 [J'le II mmmwnné H3382 NHN u¢mxgsnfica majmaEm W *Demand—Side Equilibrium: E-Y Plane *Decline in P: E-Y Plane *Further Decline in P: E-Y Plane E15 E: 54» {%¢+E +Ly .1 Q; *Aggregate Demand Curve *Demand—Side Equilibrium . Each point, Q, Q, Q, etc is a "Demand—Side Equilibrium" - $P:>T%:>TC:>TE:>TY - And Vice-versa *Aggregate Demand Curve - AD: Combinations of P and Y that are consistent with Demand-Side Equilibrium - AD is negatively-sloped *Aggregate Demand Curve . AD: Yd =D(P,E,ZAO) =D( 5 [dim Determines _ the Slope Determines the of AD position of AD Shifts in AD Curve . Diagram: T5, Ti, or TAO shifts ADto the right, and Vice-versa . Intuition: T5, T7, or TAO :> TE ::> TY ...
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