Lecture Notes Chapter 2 - 7.pdf - Note this is a summary of each lecture slide from chapter 2-7 not your test Chapter 2 and 3 The goods market and the

Lecture Notes Chapter 2 - 7.pdf - Note this is a summary of...

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Note: this is a summary of each lecture slide from chapter 2-7 not your test . Chapter 2 and 3: The goods market and the financial markets Chapter 2 : The goods market Total demand for goods: Z ≡ C + I + G + X – IM For a closed economy: X = IM = 0 → Z ≡ C + I + G [ A closed economy is self-sufficient, which means no imports come into the country and no exports leave the country. The purpose of a closed economy is to provide domestic consumers with everything they need from within the country's borders ] and [ An open economy is an economy in which there are economic activities between the domestic community and outside. People and even businesses can trade in goods and services with other people and businesses in the international community, and funds can flow as investments across the border ] Consumption: C = C(YD) where YD = Y T = disposable income (+) [ income remaining after deduction of taxes and social security charges, available to be spent or saved as one wishes . ] Simple Keynesian consumption function: C = C0 + ? 1YD C0: Autonomous consumption. Consumption when YD = 0. The intercept of the consumption function. [ Autonomous consumption is the minimum level of consumption or spending that must take place even if a consumer has no disposable income, such as spending for basic necessities. This contrasts with discretionary consumption, which is used for non- essential items ] ? 1= mpc: marginal propensity to consume [ The marginal propensity to consume (MPC) is the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it ]
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Note: this is a summary of each lecture slide from chapter 2-7 not your test . Endogenous variable (dependent variable): Variables which depends on other variables in the model and are therefore explained within the model. (consumption is endogenous in the model above) Exogenous variables (independent variable): Variables which are not explained in the model, instead it is taken as given . (investment, government expenditure and tax in the model above is assumed to be exogenous) G and T describe fiscal policy and G T = budget deficit [ Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply ] There are two equilibirms in the goods market. The first equilibrium output: Production = demand for goods Y = Z (IS relation) Y = C0 + mpc(Y T) + I + G
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