Chapter 4 Part 1

Chapter 4 Part 1 - Chapter 4 Consumption, Saving and...

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1 Chapter 4 Consumption, Saving and Investment
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2 Introduction In Chapter 3, we talked about the factors that determine the amount of output produced, or supplied. In this chapter, we consider the factors that determine the demand for goods and services. Recall the following identity: Y = C + I + G + NX
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3 Introduction This identity tells us how output produced in the current period is used. Consumption (C): Household’s demand for goods and services. Investment (I): Firm’s demand for new capital goods. Government purchases of goods and services (G) Net Exports (NX): the net demand for domestic goods by foreigners.
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4 Introduction Because the level of government purchases is determined primarily by the political process, we take G as something given. In this chapter, we consider a closed economy , that is an economy that do not engage in any international trade of goods and services and do not engage in international borrowing and lending. Result: Export = 0 and Import = 0, so NX = 0.
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5 Introduction We begin by talking about individual’s consumption and saving decisions. How consumers’ demands for goods and services are affected by their income, wealth and the interest rate . Then we talk about firm’s decisions on how much to invest. Finally, we discuss the equilibrium in the goods market.
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6 Consumption and Saving Saving is the amount left after a household or an individual decides how much to consume out of its income. The decisions on how much to consume and how much to save are actually two sides of the same coin.
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Consumption and Saving If you want to save more today, you will have to consume less today. But by saving more and building up your wealth, you are able to consume more in the future. There is a trade-off between consumption today and consumption in the future . Benefits
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Chapter 4 Part 1 - Chapter 4 Consumption, Saving and...

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