Complex+Keynesian

Complex+Keynesian - Modern Approach to the Aggregate Modern...

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Unformatted text preview: Modern Approach to the Aggregate Modern Approach to the Aggregate Expenditure Model Expenditure Model We now incorporate interest rates into the savings and investment functions, and add income taxes to the model. Showing effect of interest rate on saving and consumption spending: As we said earlier in the course, savings depends on the interest rate to some degree. To show this, we re-write consumption spending: C = a(r) + MPC*DI where a(r) is consumption spending that is sensitive to interest rates, not to changes in the yearly value of DI. Examples: Durable consumer goods; washing machines, cars, stereos, etc., are types of interest-sensitive consumer spending. Therefore, a(r) will be inversely related to the real rate of interest: a(r)/ r < 0, so that a rise in r will lead to a drop in a(r). Example: a(r) = 100 - 2r where r - percentage real return So, if r = 5, then the value of the real interest rate is 5% INVESTMENT As we said earlier, as market interest rates fall, investment projects that were not profitable at higher...
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This note was uploaded on 04/27/2011 for the course ECON 110 taught by Professor Dont during the Spring '11 term at Griggs.

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Complex+Keynesian - Modern Approach to the Aggregate Modern...

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