slide 2Model outlineSo we have built this much of our model:Production income is distributed to households.Next question: how do households spend their income?Households buy goods and services.What makes the goods market reach an equilibrium?CHAPTER 3National Income
slide 3T.CHAPTER 3National Income
slide 4CHAPTER 3National IncomeDemand for goods & servicesComponents of aggregate demand:C= consumer demand for g & sI= demand for investment goodsG= government demand for g & s(closed economy: no NX )
CHAPTER 3National IncomeCT)C
slide 6CHAPTER 3National IncomeThe consumption functionCY – TC(Y –T )1MPCThe slope of the consumption function is the MPC.
slide 7.CHAPTER 3National Income
slide 8Now you try …If consumers expect their future income to increase, what happens to their current consumption? Current saving?If the interest rate rises, what happens to consumers’ total consumption and saving?CHAPTER 3National Income
slide 9CHAPTER 3National IncomeInvestment, IThe investment function is I= I(r), where rdenotes the real interest rate,the nominal interest rate corrected for inflation. The real interest rate isthe cost of borrowing the opportunity cost of using one’s own funds to finance investment spending.So, rI
slide 10CHAPTER 3National IncomeThe investment functionrII(r)Spending on investment goods depends negatively on the real interest rate.
slide 11Investment and capitalWhich is a stock variable, and which is a flow?Investment is essential for the expansion of capital stock and future productive capacity.It is possible to disinvest.Depreciation.CHAPTER 3National Income