Lec_8_the_shape_of_the_E_curve

Lec_8_the_shape_of_t - EC 400 1 The Components of Planned Expenditure Components of Planned Expenditure • E = C I G(X-M Components of Planned

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: EC 400 1 The Components of Planned Expenditure Components of Planned Expenditure • E = C + I + G + (X-M) Components of Planned Expenditure • E = C + I + G + (X-M) • C = personal consumption expenditures EC 400 2 Components of Planned Expenditure • E = C + I + G + (X-M) • C = personal consumption expenditures • I = gross private domestic investment Components of Planned Expenditure • E = C + I + G + (X-M) • C = personal consumption expenditures • I = gross private domestic investment • G = government expenditures on goods and services Components of Planned Expenditure • E = C + I + G + (X-M) • C = personal consumption expenditures • I = gross private domestic investment • G = government expenditures on goods and services • (X-M) = 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?...
View Full Document

This note was uploaded on 09/14/2009 for the course EC 400 taught by Professor Cover during the Spring '09 term at Alabama.

Page1 / 23

Lec_8_the_shape_of_t - EC 400 1 The Components of Planned Expenditure Components of Planned Expenditure • E = C I G(X-M Components of Planned

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online