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LectureNote16 - LECTURE SIXTEEN The ISLM Model...

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Unformatted text preview: LECTURE SIXTEEN The ISLM Model Determination of Output and Interest Rate ECONOMICS 209 Professor Kevin Huang Vanderbilt University Determination of Aggregate Output The total quantity demanded of an economy's output is the sum of four types of spending Y ad = C + I + G + NX Equilibrium occurs in the economy when the total quantity of output supplied equals the total quantity of output demanded Y = Y ad Analysis assumes the price level is fixed Consumption Expenditure and the Consumption Function Income is the most important factor determining consumption spending Disposable income (Y D ) is total income less taxes (Y - T) The marginal propensity to consume ( mpc ) is the slope of the consumption function ( Δ C / Δ Y D ), the change in consumer expenditure that results from an additional dollar of disposable income a is automonous consumer expenditure, the amount of consumer expenditure that is independent of disposable income (how much will be spent when disposable income is 0) C = a + mpc ( Y D ) Investment Spending...
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This note was uploaded on 04/07/2008 for the course ECON 209 taught by Professor Professor during the Spring '08 term at Vanderbilt.

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LectureNote16 - LECTURE SIXTEEN The ISLM Model...

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