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Lecture7

# Substituting in for c s y c mpc y t t 4 which

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Unformatted text preview: − T ). Substituting in for C: S = Y − (C + MPC (Y − T )) − T (4) Which we can rewrite: S = −C + (1 − MPC )(Y − T ) (5) Equation 5 is referred to as the saving function. Notice it is the opposite of consumption. The intercept is −C and the slope is (1 − MPC ). Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 16 / 43 PAE Consumption Consumption and Saving Using C = 4 and MPC = 0.5 We have C = 4 + 0.5(YD ). And S = −4 + 0.5(YD ). We can ﬁnd the point where YD = C by setting S = 0. Doing so we have: 0 = −4 + 0.5(YD ), YD = 8. Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 17 / 43 PAE Consumption Consumption and Saving (Figure 10.3) Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 18 / 43 PAE Consumption An Increase in Wealth (Figure 10.4) Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 19 / 43 PAE Consumption, PAE, and Output Consumption, PAE, and Output The next step is to use consumption and solve for planned aggregate expenditures. Consumption is the only variable that depends on income (Y). Investment (I), Government (G), and Net Exports (NX) are independent of income. This makes them autonomous. Suppose the consumption function is: C = 800 + 0.8(Y − T ) (6) We will plug consumption into PAE: PAE = C + I p + G + NX Ryan W. Herzog (GU) Aggregate Expenditures (7) February 25, 2014 20 / 43 PAE Consumption, PAE, and Output Consumption Function (Figure 10.5) An upward sloping line with an intercept of C and slope of MPC . Figure : Planned Aggregate Expenditures and Output Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 21 / 43 PAE Consumption, PAE, and Output Solving for PAE Plugging in C : PAE = [800 + 0.8(Y − T )] + I p + G + NX Rewriting we have: PAE = [800 − 0.8T + I p + G + NX ] + 0.8Y Let’s assume T = 100, NX = 180, G = 1000, and I p = 300 PAE = 80...
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