# lec18 - C = 100 0.75 Y I = 25 C I = 125.75 Y Equilibrium C...

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4 Aggregate Output Amount produced = Aggregate output = Y Amount that people want to buy = Planned aggregate expenditures = AE Equilibrium: AE = Y 7 Today, assume: No government. No imports or exports. Prices and interest rates are fixed. 13 Relation between C and Y: C Y C 14 Planned Investment Assume firms want to invest fixed amount I. 15 Relation of AE to Y : AE Y C C + I I 16 Equilibrium: Amount people want to buy = Amount produced Planned Expenditures = Aggregate Income AE = Y C + I = Y

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17 AE Y 45 o 45 o line gives points where AE=Y 20 Equilibrium AE Y C + I Y* 22 AE Y C + I Y 1 Y* Y 2 Movement toward equilibrium. 25 Technical detail: Investment includes change in inventories. Planned investment includes planned change in inventories. Equilibrium occurs when planned change in inventories equals actual change in inventories. 26 Example: C = 100 + 0.75 Y I = 25 C + I = 125 + .75 Y 27 AE Y C + I ? 125 slope = .75
28 Example:

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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/(1-MPC)...
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lec18 - C = 100 0.75 Y I = 25 C I = 125.75 Y Equilibrium C...

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