Intermediate Macroeconomics Ch9 notes

Intermediate Macroeconomics Ch9 notes - Chapter 9: Income...

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Chapter 9: Income and Spending Aggregate Demand, Output and Equilibrium Condition: Aggregate Demand (AD): The total amount of goods wanted in the economy. AD = C + I + G + NX C: Consumption Consumption function is used to describe the relationship between private consumption and income. C = C cY + , C : autonomous consumption, C > 0. c : marginal propensity to consume (MPC), 0 < c < 1. MPC is the increase in consumption per unit increase in income. Assuming that there is no government and foreign sector, Y = C + S S = Y - C = Y - C - cY = (1-c)Y - C , let (1-c) = s S = - C + sY, s: marginal propensity to save (MPS), 0 < s < 1. Suppose investment (I), government spending, taxes and foreign trade are ALL autonomous, YD = Y+TR - TA , YD : Disposable income, TA : Lump sum taxes, TR : Transfer. AD = C + I + G + NX = NX G I TA TR Y c C + + + - + + ) ( = cY A cY TR c NX G I TA c C + = + + + + + - ) ( Equilibrium requires AD = Y in which planned spending precisely matches production. AD > Y: Decline in inventory Increase in production until AD = Y. AD < Y: Inventory piling up
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Intermediate Macroeconomics Ch9 notes - Chapter 9: Income...

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