ec-3 - Changes in Aggregate Demand: The Multiplier Effect...

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Unformatted text preview: Changes in Aggregate Demand: The Multiplier Effect Chapter 12 Review LRAS Shifts as a result of: SPENT AD Shifts as a result of: C, I, G, & X Chapter Outline Simplifying Assumptions in the Keynesian Model Determinants of Consumption and Saving Determinants of Investment Short Run Equilibrium: C + I Chapter Outline Keynesian Equilibrium C + I + G + X The Multiplier Effect The Relationship Between Aggregate Demand and the C + I + G + X Curve Keynes revisited Aggregate demand determines output (horizontal SRAS ) We will examine the elements of aggregate demand (AD = C +I + G + X) Prices are fixed, so output is in real terms Simplifying Assumptions in a Keynesian Model Assumptions Businesses pay no indirect taxes (sales tax) Businesses distribute all profits to shareholders There is no depreciation The economy is closed Thus, *GDP = DI Simplifying Assumptions in a Keynesian Model Definitions and relationships revisited Consumption Spending on new goods and services out of a households current income Saving The act of not consuming all of ones income Simplifying Assumptions in a Keynesian Model Definitions and relationships revisited Simplifying Assumptions in a Keynesian Model Disposable income = Consumption (C) +Saving (S) S =disposable income- C Keynes was concerned with changes in AD. AD = C + I + G + X Determinants of Consumption and Saving What is the primary determinant of spending (or saving)? Income (disposable) Consumption Function The relationship between planned consumption expenditures and their current level of real income Determinants of Consumption and Saving Determinants of Consumption and Saving: Ways to look at our model 3 ways to look at C + I + G + X Algebraic form C = .8DI + 100 Table form Graph form Economists are often concerned with average & marinal values Average Propensity to Consume (APC) Consumption divided by disposable income The proportion of total disposable income that is consumed Determinants of Consumption and Saving APC = Consumption Real Disposable Income...
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This note was uploaded on 04/19/2011 for the course ECON 200 taught by Professor Staff during the Winter '09 term at Indiana.

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ec-3 - Changes in Aggregate Demand: The Multiplier Effect...

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