February 2 - Slide 4

February 2 - Slide 4 - February 2, 2012 Slide 4...

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February 2, 2012 Slide 4 Intermediate Macroeconomics Outline of Model - Closed economy, flexible prices - Supply side : o factor markets (supply, demand, price) o determination of output/income o distribution of output/income - Demand side : determinants of C, I, and G - Equilibrium : goods (and service) market, financial market Demand for goods & services - Components of aggregate demand o o I = demand for investment goods o o (closed economy: no NX) Consumption, C - Households receive income from their labor and ownership of capital (W/P)L + (R/P)K = Y - Definition: disposable income is total income minus total taxes: Y - T - Households divide Y - T between consumption and saving - Consumption Function: C = C(Y - T) - Shows that ↑ (Y - T) then ↑ C - Definition: Marginal propensity to consume (MPC) is the amount by which C increases when disposable income increases by one unit: MPC = dC / [d(Y - T)] MPC < 1 o Eg: MPC = 0.7, households spend 70 cents of each additional dollar of disposable income o Assume the MPC is 0.7 and the total output is fixed. If the government made a tax
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February 2 - Slide 4 - February 2, 2012 Slide 4...

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