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Unformatted text preview: EC 400 1 The Components of Planned Expenditure Components of Planned Expenditure • E = C + I + G + (XM) Components of Planned Expenditure • E = C + I + G + (XM) • C = personal consumption expenditures EC 400 2 Components of Planned Expenditure • E = C + I + G + (XM) • C = personal consumption expenditures • I = gross private domestic investment Components of Planned Expenditure • E = C + I + G + (XM) • C = personal consumption expenditures • I = gross private domestic investment • G = government expenditures on goods and services Components of Planned Expenditure • E = C + I + G + (XM) • C = personal consumption expenditures • I = gross private domestic investment • G = government expenditures on goods and services • (XM) = net exports EC 400 3 Consumption • Total output – taxes = disposable income Consumption • Total output – taxes = disposable income • Let Y = real GDP • T = total taxes • DI = disposable income, then • DI = Y  T Consumption • C increases with DI • Share of DI saved increases with DI EC 400 4 Consumption • C increases with DI • Share of DI saved increases with DI • C = a + b·DI Consumption • C increases with DI • Share of DI saved increases with DI • C = a + b·DI • b is called the marginal propensity to consume, or MPC • MPC = the share of any increase in DI allocated to consumption. Consumption • Since a $1 increase in income is not going to cause spending to increase by more than $1, • the marginal propensity to consume is less than one Hence than one. Hence • C = a + b·DI , b<1. EC 400 5 Consumption • Since a $1 increase in income is not going to cause spending to increase by more than $1, • the marginal propensity to consume is less than one. Hence • C = a + b·DI , b<1. b DI a DI C + = Consumption 1) C = a + b·DI Consumption 1) C = a + b·DI 2) DI = Y T EC 400 6 Consumption 1) C = a + b·DI 2) DI = Y –T 3) T = τ · Y Consumption 1) C = a + b·DI 2) DI = Y –T 3) T = τ ·Y 4) DI = Y – τ ·Y DI = (1 τ ) ·Y Consumption 1) C = a + b·DI 2) DI = Y –T 3) T = τ ·Y 4) DI = Y – τ ·Y DI = (1 τ ) ·Y 5) C = a + b·(1 τ ) ·Y EC 400 7 The Consumption Function C = a + b·(1 τ ) ·Y C Y The Consumption Function C = a + b·(1 τ ) ·Y C 45 ° line Y The Consumption Function C = a + b·(1 τ ) ·Y C 45 ° line Y EC 400 8 The Consumption Function C = a + b·(1 τ ) ·Y C 45 ° line Y a The Consumption Function C = a + b·(1 τ ) ·Y C 45 ° line Y Slope = b(1 τ ) a Shifts of the Consumption Function C = a + b·(1 τ ) ·Y C 45 ° line Y Slope = b(1 τ ) a a 1 EC 400 9 Shifts of the Consumption Function C = a + b·(1 τ ) ·Y C 45 ° line Y Slope = b(1 τ ) a a 1 a 2 What can change the intercept of the consumption function?...
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This note was uploaded on 09/14/2009 for the course EC 400 taught by Professor Cover during the Spring '09 term at Alabama.
 Spring '09
 Cover

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