Powerpoint Presentation 3

Powerpoint Presentation 3 - Macroeconomics Dr. Safarzadeh...

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Macroeconomics Dr. Safarzadeh Chapters 13 - 16
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Chapter 13 Expenditure Multiplier : The Keynesian Model Circular Flow Revisited: Four Sectors of the Economy: GDP = Y = C + I + G + X - Q Consumption: The Largest (68%), and the Most Stable Component of GDP. Depends on income. Investment: The most Volatile Component of GDP. Although it is a small portion of GDP (14%), its is the main source of business cycles. Depends on interest rate and income
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Chapter 13 Expenditure Multiplier : The Keynesian Model Investment in Economics: - Fixed Investment - Residential Investment - No-Residential Investment - Changes in Inventories Why Changes in Inventories Are Important? Changes in inventories is a Leading Indicator of Economic Activities. As inventories pile up, it is an indication of a slowdown in the economy.
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Chapter 13 Expenditure Multiplier : The Keynesian Model Government Spending (20%): G an exogenous variable Exogenous Variable: Value Decided Outside the Model Transfer Payments: G Receives Nothing in Return Expenditure: G Receives Goods and Services in Return X: Exports (10%) Depend on Other Countries Income Q: Imports (12% of GDP) Depend on Our Income. X – Q: Net Exports or Trade Balances Trade Deficit: When X < Q Trade Surplus: When X > Q
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Chapter 13 Expenditure Multiplier : The Keynesian Model Demand For Goods: Z = C + I + G + X - Q For Closed Economy X = Q = 0 and Z = C + I + G Note that, Transfer payments are not included in GDP
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Chapter 13 Expenditure Multiplier : The Keynesian Model Consumption Function: Economic Models as Simplification of Reality Consumption Function: C = c (Y d ) C , Consumption; Yd , Disposable Income: Y d = Y – T Where, T is the Tax.
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Chapter 13 Expenditure Multiplier : The Keynesian Model Linear or Keynesian Consumption Function: C = c o + c 1 Y d C = c o + c 1 (Y - T) Autonomous Consumption: c o captures the wealth effect and consumer confidence. Marginal Propensity to Consume (MPC): c 1 shows increase in C for every $1 increase in Yd, dC/dY d . Marginal Propensity To Save (MPS): (1 - c 1 ) shows increase in S (saving) for every $1
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Chapter 13 Expenditure Multiplier : The Keynesian Model Investment ( I ) as an Exogenous Variable: (Value Decided Outside the Model): I = I o Examples: Money Supply and G. Endogenous Variable: A Variable that its Value is Decided Inside the Model . Examples: GDP, Consumption, and Saving.
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Chapter 13 Expenditure Multiplier : The Keynesian Model Government Spending: Fiscal Policy: Tax and Spending Policies of the Government Main Source of Government Revenue: Income and Social Security Taxes. Together, they are almost 85% of the government’s total revenue. Government Main Expenditures: Social Security Benefits and Defense Revenue > Expenses: Budget Surplus Revenue < Expenses: Budget
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Expenditure Multiplier : The Keynesian Model Equilibrium Output in the Goods Market: Y = Z Z = C + I + G, Z = c o + c 1 (Y - T) + Io + G o Y = c 0 + c 1 (Y - T) + Io + Go Y = 1/(1- c 1 )[ c o + I o + G o - c 1 T]
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This note was uploaded on 04/07/2008 for the course ECON 205 taught by Professor Kamrany during the Spring '07 term at USC.

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Powerpoint Presentation 3 - Macroeconomics Dr. Safarzadeh...

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