Topic 4 full notes

Topic 4 full notes - 4-1Sd = desired national saving; level...

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Unformatted text preview: 4-1Sd = desired national saving; level of national saving that occurs when aggregate consumption is at its desired level.Recall: S = Y-C-GSo we have Sd= Y Cd - GCd= national level of desired consumption, as the aggregate quantity of goods and services that households want to consume, given income and other factors that determine households economic opportunity.The desire to have a relatively even pattern of consumption over time is known as the consumption-smoothing motive.4-2We define marginal propensity to consume, or MPC, as the fraction of additional current income that consumes in the current period.4-3Other Determinants of CdoCurrent Income (ie. MPC): higher income will increase spending though not all will be spentoExpected Future IncomeYfYf increase, then Cd increase, Sd dropsoWealthIncrease in wealth will give an increase (< increase of wealth) in current consumption and decrease in current saving. Its smaller than the increase of wealth due to want to save some for future consumptionoRate of Interest r4-4Substitution effect: tendency to reduce current consumption to increase future consumptionIncome effect: change in current consumption that results when a higher real interest rate makes a consumer richer or poorer....
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Topic 4 full notes - 4-1Sd = desired national saving; level...

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