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Major macroeconomic variables

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YUPie

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What are the factors of national income?

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GDP = C + I + Y + (X-IM)

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What is another way of saying GDP?

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Aggregate Expenditure (AE)

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What is the goal of this macromodel?

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Finding the relation between the general price level (P) and the national income (Y).

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Desired vs. Actual Variables

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Desired = Intended, planned, no subscript

Actual = actual, measured by NIEA

Actual = actual, measured by NIEA

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Autonomous Variable

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exogenous variable that doesn't depend on Y; not a function of Y; value is given

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Example of Autonomous Variable

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Exports; as they depend on foreign Y

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Induced Variable

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Endogenous variable that depends on Y, are a function of Y

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Example of Induced Variable

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imports; depend on Canada's Y

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What are our assumptions for this chapter?

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All ceteris paribus variables are held constant (wealth, expectations, interest rates)

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What is the relationship between disposable income (Yd) and desired income?

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Positive; direct

If disposable income goes up, desired consumption goes up.

If disposable income goes up, desired consumption goes up.

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Disposable Income (Yd)

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amount of income households receives after paying tax

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Permanent Income

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the amount of income expected overtime.

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What determines the amount of disposable income households decide to consume and the amount they want to save?

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1. Consumption Function

2. Savings Function

2. Savings Function

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Consumption

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Disposable income spent on consumer goods

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Savings

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Disposable income not spent for consumer goods.

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Consumption Function

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the relationship between consumption spending and disposable income

C = f(Yd, ceterus paribus)

C = f(Yd, ceterus paribus)

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"WEI" Variables

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ceteris paribus variables; wealth, expectations, interest rates, disposable income

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45 degree line on Consumption Function Graph

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where consumption equals disposable income at any point along that line (Y = C = E)

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Break Even Income point on Consumption Function Graph

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where Y = C (point in which you begin to save)

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Desired Expenditures also is represented by

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Consumption (E=C)

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Dissavings on Consumption Function Graph

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where Y = 0, C = a (a is negative savings; borrowing)

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Five Characteristics of Consumption Function

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1. Y increases and C increases at decreasing rate or constant.

2. Dis-savings

3. Breakeven Income

4. Desired Savings

5. MPC = slope

2. Dis-savings

3. Breakeven Income

4. Desired Savings

5. MPC = slope

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Slope of the Consumption Function (b)

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MPC = ΔC/ΔYd

Usually positive to represent the positive relationship between C and Yd.

Usually positive to represent the positive relationship between C and Yd.

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When C > Yd, what is the desired savings? (+ or -)

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Negative.

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When C < Yd, what is the desired savings? (+ or -)

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Positive.

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Consumption Function Equation

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C=a+bYd

a = dissavings

b = slope of consumption function = MPC

a = dissavings

b = slope of consumption function = MPC

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Average Propensity to Consume

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proportion of disposable income that households want to consume: C/Yd

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Marginal Propensity to Consume

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How much of 1 additional dollar of income gets spent: ΔC/ΔYd

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If the MPC is constant..

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the MPC is the same at any level of income.

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Disposable Income calculated by..

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C(onsumption) + S(avings)

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Relationship between Saving and Consumption Propensities

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APS + APC = 1, lowest can be 0

MPS + APC = 1, lowest can be 0

MPS + APC = 1, lowest can be 0

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Shifts in Consumption Function

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Movement along the curve = change in independent variable (Yd) (induced)

Shift of the curve = change in ceteris paribus variables (autonomous)

Increase in Consumption = Curve shifts up

Decrease in C = curve shifts down

Shift of the curve = change in ceteris paribus variables (autonomous)

Increase in Consumption = Curve shifts up

Decrease in C = curve shifts down

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Savings Function

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How to decide how much to save; parallel to consumption

Yd = C + S

Positive Yd = + Savings

Yd = C + S

Positive Yd = + Savings

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Consumption Calculated by

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a + b(Yd)

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Savings Calculated By

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=a + (1-b)Yd

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Which of the ceteris variables have a direct influence on Consumption?

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Wealth and Expectations

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Wealth is calculated by..

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Assets - Liabilities

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How do expectations have a direct relationship to consumption?

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When we are optimistic about the future, more consumption!

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Why does interest rates have an inverse relation to Consumption?

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ex.) Low interest rates, high consumption