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

Info icon This preview shows pages 45–54. Sign up to view the full content.

View Full Document Right Arrow Icon
) ( 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
Image of page 45

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

View Full Document Right Arrow Icon
42 Consumption Function
Image of page 46
43 Consumption Function C ) ( T Y c C C + = C slope = c 0 (Y-T)
Image of page 47

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

View Full Document Right Arrow Icon
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
Image of page 48
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.
Image of page 49

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

View Full Document Right Arrow Icon
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
Image of page 50