Lecture3_GoodsMkt&IScurve_PartI

Lecture3_GoodsMkt&IScurve_PartI - EC3024 Managerial...

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EC3024 Managerial Macroeconomics The Goods Market and IS Curve
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The Composition of GDP 2
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The Composition of GDP Inventory investment is the difference between production and sales. Net exports ( X IM ) is the difference between exports and imports, also called the trade balance . 3 E x p o r t s > i m p o r t s t r a d e s u r p l u s E x p o r t s < i m p o r t s t r a d e d e f i c i t E x p o r t s = i m p o r t s t r a d e b a l a n c e
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The Demand for Goods The total demand for goods is written as: The symbol “ ” means that this equation is an identity , or definition. 4 Z C I G X I M
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The Demand for Goods Assumptions (Through the whole course) Assume that all firms produce the same good, which can then be used by consumers for consumption, by firms for investment, or by the government. (Up to the open economy) Assume that the economy is closed , that it does not trade with the rest of the world, then both exports and imports are zero: X = IM = 0 Demand is thus simplified to: 5 Z C I G
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The Demand for Goods Assumptions (For short-run analysis – up to AS-AD model) Assume that firms are willing to supply any amount of the good at a given price, P Production automatically meets demand The price level is fixed and 6 0 0 e r i
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The Demand for Goods Disposable income , ( Y D ), is the income that remains once consumers have paid taxes and received transfers from the government. T is taxes paid minus government transfers (taxes for short) The function C ( Y D ) is called the consumption function . It is a behavioral equation , that is, it captures the behavior of consumers. Consumption ( C ) 7 C C Y D ( ) ( ) Y Y T D
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The Demand for Goods This function has two parameters , c 0 and c 1 : c 1 is called the (marginal) propensity to consume -- the effect of an additional dollar of disposable income on consumption.
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