microbook_3e-page8 - goods exceed your income. (You run...

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AC = 0.57*AI + 13,539 marginal propensity to consume I’m using an example from macroeconomics, because some of you have already taken a macro course. If you haven’t … Don’t worry. We’re just reviewing basic algebra. x If your boss increased your income from $31,000 to $32,000, how much more would you consume? o On average, you would consume an extra $570 worth of goods. o Put differently, if you were an average person, your expenditure on consumption goods would rise from $31,209 to $31,779. x Every $1000 increase in income raises consumption by $570. Why? x marginal propensity to consume = 0.57 (NB: that’s the slope of the line!) x What if you got fired? How much would you consume? x Your income would fall to zero, but you’d still consume $13,539 worth of goods. After all, you’ve got to eat! x When your income is less than $31,486 your expenditures on consumption
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Unformatted text preview: goods exceed your income. (You run down your savings) . x When your income is more than $31,486 your income exceeds your expenditures on consumption goods. (You save some of your income) . A few more definitions AC = 0.57*AI + 13,539 x Model the formal statement of a theory, often presented using mathematical equations x Variable a measure that can change such as consumption or income o Dependent variable o Independent variable o In the example above, consumption depends on income. x Parameters values which remain constant in an equation (here: 0.57 and 13,539) Y = C + I + G + (XM) x Ceteris paribus all else equal x How does an increase in investment, I , affect national income, Y ? x To answer this question we must hold all other variables constant, while we determine the effect of investment alone. Page 8...
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This note was uploaded on 12/29/2011 for the course ECO 311 taught by Professor Willis during the Fall '10 term at SUNY Stony Brook.

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