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MacroEcon Chapter 11

MacroEcon Chapter 11 - Chapter 11 Short Run Macro Model in...

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Chapter 11: Short- Run Macro Model in the short run, spending depends on income, income depends on spending circular connection between spending and income short-run macro model explains how changes in spending can affect real GDP in the short run short-run view: total spending determines the level of production Real: adjusted for change in price level Nominal: measured in current money I. Consumption Spending A. Determinants of Consumption Spending I. Disposable Income Not really your income, but rather what you get to keep after deducting any taxes Some people also receive transfer payments- $$ payments or unemployment insurance benefits Disposable Income: income- tax payments + transfers received – taxes- transfer= net taxes D.I = income – (taxes- transfers) DI= income – net taxes Rise in DI, causes rise in consumption spending II. Wealth Consumption spending: also influenced by wealth Even if DI stayed the same but wealth increased, people spend more
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III. Interest Rates Reward people get for saving or what they pay when they borrow Ex: interest rate= 10%- saved put more money in banks when interest rates increase; credit card debt, pay back quickly so you don’t owe more All else equal, rise interest rate causes decreases in consumption spending IV: Expectations Optimism about future income caused increase in spending Phrases like- disposable income, wealth means total wealth, total consumption Consumption spending increases DI rises, wealth rises, interest rate decreases, households optimistic about future B. Consumption and Disposable Income Most important and stable= Disposable income Relationship between DI and C is linear I. Consumption Function Consumption function: functional relationship between consumption and DI (positively sloped) Has a vertical intercept and a slope II. Autonomous Consumption Vertical intercept of consumption function (y-intercept) = autonomous consumption spending ACS: part of consumption spending that is independent of income, vertical intercept of consumption function Tells us how much consumption spending would be if DI was zero Real purpose: isolate autonomous consumption to help identify particular line that represents (c) , positive income levels
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Autonomous consumption- influence on consumption spending of everything other than disputable income Ex: wealth increases, consumption would be greater entire figure would shift upward (vice versa) III. Marginal propensity to consume Slope: change in consumption/ change in DI Ex: 600/1000= .6 Marginal propensity to consume (MPC) Amount by which C rises when DI rises by one dollar Used in 3 ways: (same meaning) Slope of Consumption function Change in C divided by change in DI Amount by which C rises when DI income rises by $1 ** 0 <mpc <1 IV. Representing Consumption with an equation C= a+bx x (DI) [straight line consumption] C= consumption spending A= vertical intercept (at which DI is 0)= ACS B= slope of C (MPC) How much consumption increases each time DI increasea II. Consumption & Income Consumption: largest component of spending Limitation: value of consumption at each level of disposable income, whereas we need to know value of consumption spending at each level of income
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