ch3c - The economic story of our model so far GDP(denoted by Y is produced with factors of production K and L People receive payments as factor income

# ch3c - The economic story of our model so far GDP(denoted...

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slide 1 CHAPTER 3 National Income
slide 2 Model outline So 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 3 National Income
slide 3 T. CHAPTER 3 National Income
slide 4 CHAPTER 3 National Income Demand for goods & services Components of aggregate demand: C = consumer demand for g & s I = demand for investment goods G = government demand for g & s (closed economy: no NX )
CHAPTER 3 National Income C T ) C
slide 6 CHAPTER 3 National Income The consumption function C Y – T C ( Y T ) 1 MPC The slope of the consumption function is the MPC .
slide 7 . CHAPTER 3 National Income
slide 8 Now 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 3 National Income
slide 9 CHAPTER 3 National Income Investment, I The investment function is I = I ( r ), where r denotes the real interest rate , the nominal interest rate corrected for inflation. The real interest rate is the cost of borrowing the opportunity cost of using one’s own funds to finance investment spending. So, r I
slide 10 CHAPTER 3 National Income The investment function r I I ( r ) Spending on investment goods depends negatively on the real interest rate.
slide 11 Investment and capital Which 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 3 National Income