Econ1102_Week_4a

# T y c c c c t y c mpc assume 0 c 1 a dollar increase

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) ( T Y c C C + = c T Y C MPC = = ) ( Assume: 0 < c < 1 A dollar increase in disposable income raises consumption by less than one dollar

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42 Consumption Function
43 Consumption Function C ) ( T Y c C C + = C slope = c 0 (Y-T)

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44 PAE and Output Given our definition of PAE and model of consumption expenditure we can re-write PAE as follows NX G I C PAE P + + + = ) ( T Y c C C + = NX G I T Y c C PAE P + + + + = ) ( cY NX G I cT C PAE P + + + + = ] [ The first terms is independent of output and is called exogenous expenditure The second term is called induced expenditure since it depends on output
45 Short-Run Equilibrium Output We define equilibrium as being when firms produce a level of output that equals planned aggregate expenditure PAE Y = Using the equation for PAE, cY NX G I cT C PAE P + + + + = ] [ and the above definition of equilibrium it is straightforward to solve for equilibrium output.

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46 Equilibrium Output PAE Y = cY NX G I cT C PAE P + + + + = ] [ Substituting cY NX G I cT C Y P + + + + = ] [ Collect terms in Y ] [ ) 1 ( NX G I cT C c Y P + + + = ] [ ) 1 ( 1 NX G I cT C c Y P e + + + = e Y is short-run equilibrium output