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econ162b_42308

# econ162b_42308 - • B= MPC • Yd= Disposable Income o Y-T...

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23/04/2008 10:03:00 Classical Model- Say’s Law Spending adjusts to output Keynesian Model: Output adjusts to spending  Keynesian critique: 1) Wages, prices, and interest rates maybe sticky 2) Money illusions may exist 3) Business confidence is important 4) Importance of expenditures 5) Role for Government 6) Short run fluctuations Fixed Keynesian Model Assumptions: 1) Rational Self-Interest 2) Prices are fixed (short run) 3) Consumption spending depends on income 4) I,G, (X-M) are fixed 5) Taxes= 0 Consumption Function- a model that shows the relationship between  consumption spending and disposable income C= Consumption spending C0= Autonomous consumption spending

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Unformatted text preview: • B= MPC • Yd= Disposable Income o Y-T • MPC= Marginal Propensity to Consume o ∆C o ∆Yd • 0<MPC<1 ← Equation for Consumption Function • C= Co= bYd o Co= Vertical intercept o b= slope ← Saving Function • S= Yd-C • S= Yd- (Co+bYd) o S= Yd- Co- bYd • S= Co+ (1-b)Yd o C0= Autonomous dissaving— Amount you’re consuming at 0 income, which must be coming from your savings o (1-b) is the MPS which is the Marginal Propensity to Save. MPC= MPS- 1 Keynesian Equilibirum • Y= AE • Y= output (GDP) • AE= spending o Assume T-G Yd-Y 23/04/2008 10:03:00 ← 23/04/2008 10:03:00 ←...
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