Chapter 21

Chapter 21 - Chapter 21: The simplest short-run macro model...

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Chapter 21: The simplest short-run macro model 21.1 Desired Aggregate Expenditure Desired expenditure : what people desire to spend out of the resources that they actually have Desired aggregate expenditure : the sum of desired or planned spending on domestic output by households, firms, governments, and foreigners = C + I + G + (X-IM) National income accounts measure actual expenditure in each of the four expenditure categories. National income theory deals with desired expenditures in each of these four categories (AE ≠ Y) Autonomous expenditure: components of the AE that DO NOT depend on national income. Can change but not in response to national income. Induced expenditure : components of expenditure that is systematically related to national income. Chapter assumption Closed economy: No trade with other countries No government Constant price level Desired Consumption Expenditure In this chapter, disposable income (Yd) = Y Can be consumed or saved Consumption function : relationship between desired consumptions and variables determining it. Factors: disposable income*, wealth, interest rates, expectations about the future Holding constant other determinants of desired consumption, an increase in disposable income is assumed to lead to an increase in consumption. C: desired consumption / Yd : disposable income Ex: C = 30 + 0.8Yd 30 autonomous / 0.8Yd induced If disposable income is zero, desired aggregate consumption will be $30 and for every one- dollar increase in Yd desired consumption will rise by 0.80$
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This note was uploaded on 04/17/2008 for the course ECON 295 taught by Professor Ragan during the Winter '08 term at McGill.

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Chapter 21 - Chapter 21: The simplest short-run macro model...

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