ECO2004S Summary that will change everything! (1).pdf

# Differences due to rounding o of people employed

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Differences due to rounding. o of people employed Working-age population x 100

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Okun’s Law If output is high unemployment will decrease Slope of the line is -0.4 so a 1% increase in the growth rate decreases unemployment rate by 0.4% Horizontal intercept is 3% so a growth rate of 3% will keep unemployment rate constant (not zero because of natural rate of unemployment) Phillips Curve If unemployment is low, inflation is high Now defined as the relation between the change in the rate of inflation and the unemployment rate From here we can examine if it's possible to balance between these important economic variables CHAPETR 3: THE GOODS MARKET Simplified assumptions One market in which all the firms produce the same good Fixed price and unlimited supply Closed economy: X=IM=0 Total demand for goods is: Z=C+I+G+(X-M) (X-M)=0 (closed economy) Z = C + I + G C= Consumption I = Investments G= government spending
Consumption C Consumers consumptio Disposable income is th - More money after tax, the - More money after tax the m MPC is the slop 0<C 1 <1 Key aspects: 1. Co 2. Co 3. Co di Investment (I) Determined outside of - If productio Exogenous = outside th Endogenous = inside th Ī = exogenous investm Government spending (G) Government spending G & T are exogenous C = Y d = Y-T C= consumption Y d = disposable incom on he main determinant more you spend more you spend pe of the function onsumption increases as disposable incom onsumption is positive at zero income - Autonomous income - Non-income derivatives - Dissaving onsumption increases less than the increas isposable income (because MPC < 1) - Save some income the model (exogenous) on changes investment will not respond he model he model ment and taxation = fiscal policy me C = c 0 + c 1 Y D = c C 0 = autonomous consumpti C 1 = Marginal propensity to Y d = disposable income me increases se in c 0 + c 1 (Y-T) ion (C o > 0 = dissaving) o consume (MPC)

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Demand for goods (Z) Total demand for good Therefore demand d Equilibrium in the goods Ma Production/output (Y) Y=Z Demand depends on in Income depends on pro The eqn is known as th Y = Determining Equilibrium ou SR demand determined Z < Y then output will d Z > Y then output will i ds: Z = C + I + G Z = c 0 + c 1 (Y-T) + Ī + G depends on: Y, I, and G arket (IS relationship) ) must be equal to demand (Z) ncome oduction he IS relationship = Z = c 0 + c 1 (Y-T) + Ī + G utput d output decrease increase Equilibrium co onditions
1. Autonomous spendin (independent of output 2. Multiplier: - 1 > MPC (C 1 - This has imp seeing as th greater than - This means increase in o consumptio Investment = Savings Alternative way of thin Savings = Private + Pub Investment = Savings = IS relation: what firms consumers want to sav ng is the part of demand that does not depe t) ) > 0 plications for the multiplier which is 1/ (1- hough MPC > 0 and < 1 then Multiplier ends n 1 (C 1 can never be zero) that an increase in (C 0 – C 1 T + I + G) will re output greater than the initial increase in on nking about the goods market blic

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• Fall '11
• ENikolaidou

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