ECO 16 - 23 FEB

# ECO 16 23 FEB - Lecture 16 ECO 100Y5Y 23 February 2009 A Cohen PARKIN BADE ECONOMICS February 2009 PARKIN BADE ECONOMICS Chapter 23 Expenditure

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Lecture 16 23 February 2009 ECO 100Y5Y A. Cohen 1 E C O N O M I C S PARKIN BADE Lecture 16 23 February 2009 E C O N O M I C S PARKIN BADE Chapter 23 Expenditure Multipliers From AD perspective, what determines level GDP (Y)? Say’s Law — supply creates its own demand Keynes identified fallacy of Say’s Law Planned Expenditures = or Actual Output Aggregate planned expenditure ( AE ) is key concept to determine level GDP AE = planned C + I + G + X M AE model assumes prices fixed We will relax that assumption in moving from AE model to AS /AD model

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Lecture 16 23 February 2009 ECO 100Y5Y A. Cohen 2 Expenditure Plans and GDP: Consumption Consumption function — relation between planned C and disposable income ( YD ), ceteris paribus disposable income — YD = income + transfers taxes Net taxes NT = (taxes transfers) YD = Y NT Associated Saving function — C + S = YD S = YD C continued Δ YD = \$200b 200 400 600 800 1000 0 A B C D E F 200 400 600 800 1000 \$ 150b = Δ C MPC = 0.75 C = 150 + .75 YD 45 o line Figure 23.2a Marginal Propensities to Consume and Save: Consumption Function YD C Marginal propensity to consume ( MPC ) = Δ C / Δ YD = slope of consumption function continued
Lecture 16 23 February 2009 ECO 100Y5Y A. Cohen 3 0 -200 200 200 600 800 1000 S = 150 + .25 YD A B C D E F 400 MPS = 0.25 Δ YD = \$200b Δ S = \$50b S YD Figure 23.2b Marginal Propensities to Consume and Save: Saving Function Marginal propensity to save ( MPS ) = Δ S / Δ YD = slope of saving function continued C + S = YD Δ C + Δ S = Δ YD Δ C / Δ YD + Δ S / Δ YD = Δ YD / Δ YD MPC + MPS = 1 continued

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Lecture 16 23 February 2009 ECO 100Y5Y A. Cohen 4
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## This note was uploaded on 04/25/2010 for the course ECONOMICS ECO100Y taught by Professor Furlong during the Fall '09 term at University of Toronto- Toronto.

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ECO 16 23 FEB - Lecture 16 ECO 100Y5Y 23 February 2009 A Cohen PARKIN BADE ECONOMICS February 2009 PARKIN BADE ECONOMICS Chapter 23 Expenditure

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