202.T&C.3 - Econ 202 Terms and Concepts for Weeks 3 and...

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Econ 202: Terms and Concepts for Weeks 3 and 4 In the Macroeconomy, the equilibrium level of output and employment comes about through changes in Income, not through changes in prices. Incomes change in response to changes in Expenditures or Aggregate Demand . The National Income Identity : Y = C + Ig + G + Xn Incomes = Consumption + Gross Investment + Government Spending + Net Exports When the equation takes this form, with Gross Investment, the Y represents Gross Domestic Product. This is Aggregate Demand Y = C + In + G + Xn Incomes = Consumption + Net Investment + Government Spending + Net Exports When the equation takes this form, with Net Investment, the Y represents Net Domestic Product (NDP) Y = C + S Incomes = Consumption + Savings When we decompose Incomes into Consumption and Savings, the Y represents Disposable Income, because this is account over which the consumer has spending control, and with respect to which the spending habits of consumers can be treated as quite constant. Y = C + Ig Incomes = Consumption + Investment This Y also represents Disposable Income, showing the fact that all income must be expended on either consumer goods or capital goods. If Investment is insufficient, then Savings are also reduced by the decline in income that is caused by inadequate spending. the consumption function – a function showing the relationship between consumption and income; C(Y). It’s slope, c , is positive and fractional, and called the marginal propensity to consume (see below) the investment demand curve – shows investment as a function of the interest rate on financial capital.
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