ifeel aggregate y, c s 4
TRANSCRIPT
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Outline
I. Aggregate output and aggregateincome (Y)
II. Equilibrium Aggregate Output(income)
III. The multiplier
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I. Aggregate Output and
Aggregate Income (Y)
Aggregate outputis the total quantityof goods and services produced (orsupplied) in an economy in a given
period. Aggregate incomeis the total income
received by all factors of production ina given period.
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I. Aggregate Output and
Aggregate Income (Y)
Aggregate output (income) (Y)is acombined term used to remind you of theexact equality between aggregate output
and aggregate income.
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Income, Consumption,
and Saving (Y, C, and S)
Saving (S)is the part of its income that ahousehold does not consume in a given
period. Distinguished from savings, which isthe current stock of accumulated saving.
S Y C
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Explaining Spending Behavior
All income is either spent on consumption or saved inan economy in which there are no taxes.
Saving = Aggregate Income Consumption
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Household Consumption and
Saving Some determinants of aggregate
consumption include:
1. Household income
2. Interest rates3. Households expectations about
the future
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Household Consumption and
Saving
The relationship betweenconsumption and income iscalled the consumption
function.
For an individualhousehold, the consumptionfunction shows the level of
consumption at each levelof household income.
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Household Consumption and
Saving
The slope of the
consumption function (b) iscalled the marginalpropensity to consume(MPC), or the fraction of achange in income that isconsumed, or spent.
C a bY =
0 1 b
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An Aggregate Consumption Function
C Y 100 75.AGGREGATEINCOME, Y
(BILLIONS OFDOLLARS)
AGGREGATECONSUMPTION, C
(BILLIONS OFDOLLARS)
0 100
80 160
100 175
200 250
400 400
400 550
800 700
1,000 850
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An Aggregate Consumption Function
Derived from the Equation C= 100 +
.75Y
At a national income of
zero, consumption is$100 billion (a).
For every $100 billionincrease in income
(D
Y), consumption risesby $75 billion (DC).
C Y 100 75.
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Deriving a Saving Function
from a Consumption Function
S Y C Y - C = S
AGGREGATEINCOME
(Billions ofDollars)
AGGREGATECONSUMPTION
(Billions ofDollars)
AGGREGATESAVING
(Billions ofDollars)
0 100 -100
80 160 -80100 175 -75
200 250 -50
400 400 0
600 550 50
800 700 100
1,000 850 150
C Y 100 75.
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Planned Investment (I)
Investmentrefers to purchases by firms ofnew buildings and equipment and additions toinventories, all of which add to firms capital
stock.
change in inventory= production sales
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The Planned Investment Function
For now, we will assumethat planned investment isfixed. It does not change
when income changes. When a variable, such as
planned investment, isassumed not to depend on
the state of the economy, itis said to be anautonomous variable.
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Planned Aggregate Expenditure
(AE)
Planned aggregateexpenditureis thetotal amount the
economy plans tospend in a givenperiod. It is equal toconsumption plusplanned investment.
ICAE
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II. Equilibrium Aggregate
Output (Income)
Equilibriumoccurs when there is notendency for change. In the macroeconomicgoods market, equilibrium occurs when
planned aggregate expenditure is equal toaggregate output.
aggregate output Yplanned aggregate expenditure AE=C+ Iequilibrium: Y= AE, orY= C+ I
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II. Equilibrium Aggregate
Output (Income)
Y > C+ I
aggregate output > planned aggregate expenditureinventory investment is greater than planned
actual investment is greater than planned investment
Disequilibria:
C+ I > Yplanned aggregate expenditure > aggregate outputinventory investment is smaller than planned
actual investment is less than planned investment
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II. Equilibrium Aggregate
Output (Income)
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II. Equilibrium Aggregate
Output (Income)
C Y 100 75. I 25Deriving the Planned Aggregate Expenditure Schedule and Finding Equilibrium (All Figures in Billions ofDollars) The Figures in Column 2 are Based on the Equation C= 100 + .75Y.
(1) (2) (3) (4) (5) (6)
AGGREGATEOUTPUT
(INCOME) (Y)AGGREGATE
CONSUMPTION (C)PLANNED
INVESTMENT (I)
PLANNEDAGGREGATE
EXPENDITURE (AE)C+ I
UNPLANNEDINVENTORY
CHANGEY (C+ I)
EQUILIBRIUM?(Y= AE?)
100 175 25 200 100 No
200 250 25 275 75 No
400 400 25 425 25 No500 475 25 500 0 Yes
600 550 25 575 + 25 No
800 700 25 725 + 75 No
1,000 850 25 875 + 125 No
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II. Equilibrium Aggregate
Output (Income)
AE C I (1)
C Y 100 75.(2)
I 25(3)
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The Saving/Investment
Approach to Equilibrium
If planned investment is exactly equal to saving, thenplanned aggregate expenditure is exactly equal to
aggregate output, and there is equilibrium.
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The S=IApproach to Equilibrium
Aggregate output will be equal to plannedaggregate expenditure only when savingequals planned investment (S= I).
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III. The Multiplier
The multiplieris the ratio of the change in theequilibrium level of output to a change in someautonomous variable.
In this chapter, for example, we consider plannedinvestment to be autonomous.
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III. The Multiplier
The multiplier of autonomous investmentdescribes the impact of an initial increase inplanned investment on production, income,
consumption spending, and equilibriumincome.
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III. The Multiplier Equation
multiplierMPS
1
, or multiplier MPC
1
1
The size of the multiplier depends on the slope of
the planned aggregate expenditure line.
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The Multiplier
After an increase inplanned investment,equilibrium output is
four times theamount of theincrease in plannedinvestment.
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The Size of the Multiplier
in the Real World
The size of the multiplier in the U.S.economy is about 1.4. For example, asustained increase in autonomous
spending of $10 billion into the U.S.economy can be expected to raise realGDPover time by $14 billion.
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The Paradox of Thrift
When householdsbecome concernedabout the future and
decide to save more,the correspondingdecrease inconsumption leads toa drop in spendingand income.
Households end up consuming less, butthey have not saved any more.
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