Please enable JavaScript.
Coggle requires JavaScript to display documents.
W02 - Income and Spending (AD & Equilibrium Output (AD: total amount…
W02 - Income and Spending
Business Cycle
Def: alternation of periods of rapid/slow growth in real GDP
Causes
Demand shocks:
significant change in desired spending by C,
business firms, G or foreigners (e.g. consumer confidence, business optimism, prices changes, changes in foreign demand for goods & services produces etc.)
Monetary & fiscal policy
Planned Expenditure
Consumption Function
C = Ca + c (Y - T)
Ca: autonomous C, independent of disposable income
c: marginal propensity to consume, the amount by which C expenditures increase for each extra dollar of disposable income
Y - T: induced consumption, the portion of C spending that responds to changes in income
AD & Equilibrium Output
AD: total amount of goods demanded in the econ
AD = C + I + G + NX
AD function consists of
autonomous spending
&
induced spending
Equilibrium output: output supplied quantity = quantity demanded
Y = AD = C + I + G + NX
AD not equal to output => unplanned changes in inventories
IU = Y - AD
IU > 0 unplanned inventory accumulation
IU < 0 unplanned inventory run down
C function & AD
Saving
S = Y - C = - Ca + (1-c)Y
s: MPS
s = 1 - c
Adding other elements
C = Ca + c (Y - TA + TR)
Yd = Y - TA + TR: disposable income
Y = AD = C + I + G + NX
= [|C| - c ( |TA| - |TR| + I + |G| + |NX| ] + cY
= |A| + cY
=> Equilibrium output: Yo = |A| . (1/(1-c))
=> AD curve: c = slope, A (autonomous spending) = intercept
The multiplier
Amount by which equilibrium income changes hen autonomous AD (|A|) increases by 1 unit
Closed econ multiplier (no gov income taxes)
alpha = 1/1-c
=> size of multiplier depends on size of MPC
The Gov Sector
