Topics3-6_Review - ECON 303 Intermediate Economic Theory Macroeconomics I Topics 3 \u2212 6 Review Muna Esheba Outline I The Goods Market I Financial

Topics3-6_Review - ECON 303 Intermediate Economic...

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ECON 303: Intermediate Economic TheoryMacroeconomics ITopics 3-6 ReviewMuna EshebaOctober 10, 2019
OutlineIThe Goods MarketIFinancial MarketsITheIS-LMModelIOpenness in Goods and Financial MarketsEsheba(U of C)Topics 3-6 ReviewOctober 10, 20191 / 24
The Goods MarketWhat Determines the Demand for Goods and ServicesIThe total demand for goods (Z) is:ZC+I+G+X-QIConsumption (C)IThe main determinant of consumption (C) is disposable income (YD):YDY-TIThe consumption function:C=C(YD)(+)IA specific consumption function:C=c0+c1YDIThe marginal propensity to consume (MPC): 0<c1<1ISlope:CYD=c1Esheba(U of C)Topics 3-6 ReviewOctober 10, 20192 / 24
The Goods MarketWhat Determines the Demand for Goods and ServicesIInvestment (I)IInvestment is an exogenous variable:I=¯IIInvestment is an endogenous variable:I=I(i)(-)IInvestment is an endogenous variable:I=I(Y,i)(+,-)Esheba(U of C)Topics 3-6 ReviewOctober 10, 20193 / 24
The Goods MarketWhat Determines the Demand for Goods and ServicesITaxes (T)ITaxes is an exogenous variableILump-sum taxT=¯TIConsumption tax rateT=tCIIncome tax rateT=tYIGovernment spending (G)IGovernment spending is an exogenous variableG=¯GEsheba(U of C)Topics 3-6 ReviewOctober 10, 20194 / 24
The Goods MarketWhat Determines the Demand for Goods and ServicesIThe economy is closedX=Q= 0IDemand for Goods (Z) depends on income (Y), taxes (T),investment (I), and government spending (G)ZC+I+GZc0+c1(Y-T)|{z}C+I+GEsheba(U of C)Topics 3-6 ReviewOctober 10, 20195 / 24
The Goods MarketHow Equilibrium in the Goods Market is AchievedIEquilibrium in the goods marketoccurs when supply of goods (Y)equals the demand for Goods (Z):Y=ZIThe equilibrium level of outputY=11-c1|{z}Multiplier(c0-c1¯T+¯I+¯G)|{z}Autonomous spendingEsheba(U of C)Topics 3-6 ReviewOctober 10, 20196 / 24
The Goods MarketHow Equilibrium in the Goods Market is AchievedIThe alternative (but equivalent) equilibrium condition isI=S:investment equals the sum of private and public savingI=-c0+ (1-c1) (Y-T)|{z}Private Saving S=YD-C=Y-T-C+ (T-G)|{z}Public SavingI

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