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Unformatted text preview: C = 100 + 0.75 Y I = 25 C + I = 125 + .75 Y Equilibrium: C + I = Y 125 + .75 Y = Y 125 = .25 Y 125 / .25 = Y 500 = Y 29 AE Y C + I 500 125 slope = .75 30 Equilibrium output might not be full employment output. AE Y C + I Y* Y F 31 A rise in consumption or investment raises equilibrium output. AE Y C + I 2 Y 2 C + I 1 Y 1 32 AE Y C + I 2 Y 2 C + I 1 Y 1 Output rises MORE than the increase in consumption or investment. 36 Marginal Propensity to Consume MPC = the portion of an extra dollar of income that consumers spend. Example: C = 100 + .75 Y MPC = .75 C = 100 + .9 Y MPC = .9 37 The Multiplier The amount that Y rises for each $1 rise in C or I. 45 The Multiplier 1 + MPC * 1 + MPC*(MPC) + MPC*(MPC 2 )+ … = 1 + MPC + MPC 2 + MPC 3 + … = Σ t=0,. .. MPC t = 1/(1MPC)...
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 Fall '08
 MarthOlney
 Economics, Macroeconomics, Interest Rates, $1, AE, AE=Y AE AE

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