econ101fall11lecture4

econ101fall11lecture4 - Theory of Income and Output...

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Theory of Income and Output Determination Required Readings • Chapter 8, pp. 147-159 • Chapter 9, pp. 169-174 pp. 176-184 Appendix A
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Role of Theory In Economics • Scientific Method Develop “Theories” or “Models” “Test” the Theories “Good” vs. “Bad” Theories Focus is on Society and the Economy
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• All Theory Simplifies Complexity of economic behavior Impossible to keep track of every force Not desirable: Many have a tiny effect “Good” theories focus on the most important forces
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Analytical Framework • Contains two key diagrams Income – Expenditure diagram Aggregate Demand – Aggregate Supply diagram
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Basic Questions • What determines the level of real income and output in the economy? • What causes changes in real income and output? • What role can monetary and fiscal policy play?
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Some Simplifying Assumptions • No Government: G = 0 • Closed Economy: X = M = 0
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GDP Identity: Income Approach Y Real Income Real Output  GDP GDP Y FI
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GDP Identity: Expenditure Approach - Exp GDP GDP C I G X M  Simplying Assumptions: 0 GX M  Exp GDP GDP C I
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Implications Income Approach: FI GDP GDP Y Key Implication: YC I Expenditure Approach: Exp GDP GDP C I 
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Interpretation YC I
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GDP Identity vs. Equilibrium Condition Y C + I Y Actual Real Income Actual Real Output C Actual Real Consumption Expenditures I Actual Real Investment Expenditures GDP Identity: aa a a a a 
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Y = C + I Y Planned Real Income Planned Real Output
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This note was uploaded on 01/12/2012 for the course ECON AS.180.101 taught by Professor Maccini during the Fall '08 term at Johns Hopkins.

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econ101fall11lecture4 - Theory of Income and Output...

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