Chapter+7+-+Goods+and+Services+Market

Chapter+7+-+Goods+and+Services+Market - Chapter 7 Study...

Info iconThis preview shows pages 1–14. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 7 Study Guide To Accompany Macroeconomics: Theory and Policy By B. Modjtahedit Prepared by T. J. McCarthy and B. Modjtahedi University of California, Davis National Income Identity Key Points Real GDP (Y) Real Expenditure Real GDP (Y) Aggregate Demand (AD) Unplanned Inventory Changes If Unplanned Inventory Changes = 0 Real GDP (Y) Aggregate Demand AD = This is called Goods Market Equilibrium. + Key Points Y AD = C I G X M Y = + + + Goods Market Equilibrium Consumption Spending Investment Spending Government Spending Net Exports Key Points AD Y = How Does the Goods Market Reach Equilibrium? If Y < AD Producers will: Increase Production: Y Increase Prices: P Or a Combination: Y & P If Y > AD Producers will: Decrease Production: Y Decrease Prices: P Or a Combination: Y & P In this chapter we will assume fixed prices and focus on quantity adjustments Key Points C I G X M Y = + + + Goods Market Equilibrium C I G EX IM Determinants of Real Disposable Income: Y d = Y TX + TR Expected Future Real Disposable Income: Y d e = Y e TX e + TR e Real Wealth: A/P Ex-Ante Real Interest Rate: r - e + + + Key Points C I G X M Y = + + + Goods Market Equilibrium C I G EX IM Determinants of Ex-Ante Real Interest Rate: r - e Expected Future Profits + Uncertainty about Future Profits Key Points C I G X M Y = + + + Goods Market Equilibrium C I G EX IM Determinants of Ongoing spending such as those on national defense and infrastructure Fiscal policy: Spending to influence the state of the economy Determinants of We will assume the economy is closed to international trade, (EX IM) = 0 Key Points Marginal Propensity to Consume (MPC): The fraction of additional disposable income consumed Marginal Propensity to Save (MPS): The fraction of additional disposable income saved MPC + MPS = 1 Key Points Expenditure Multiplier For Example, if MPC = 0.80, then Key Points Three ways to increase G or TR: Raise an equal amount of tax. This is called balanced budget increase in spending. Borrow money. This is called deficit spending or deficit financing . Print money. This is called monetizing the debt . Key Points Balanced-Budget Increase in Government Expenditure 1. Trace the effect of a change in G, TX, or TR on AD 2. Use the multiplier formula to find the effect on Y G = AD TX Yd MPC = C = AD Multiplier = Y Multiplier = Y TR Yd MPC = C = AD Multiplier = Y Key Points Balanced budget increase in spending (G) G = TX Say that MPC = 0.80 and G = TX = 100 TX by 100 Y d by 100 C by 80 AD by 80 Net AD by 20 G by 100 AD by 100 Y = Multiplier AD = 5 20 = 100 Key Points Balanced budget increase in Transfer Payments (TR) TR = TX Say that MPC = 0.80 and TR = TX = 100 TX by 100 Y d by 100 C by 80 AD by 80 Net AD by 0 TR by 100 AD by 80 Y d by 100 C by 80 Y = Multiplier AD = 5 0 = 0 Key Points...
View Full Document

Page1 / 47

Chapter+7+-+Goods+and+Services+Market - Chapter 7 Study...

This preview shows document pages 1 - 14. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online