Expenditure Models Flashcards
(21 cards)
Recession
2+ quarters w/ decreased real GDP
What assumption is the model making?
Price & Interest rates are fixed in the bid war
What is the model of consumption?
C= _c (autonomous consumption) + mpc(Y-t=YD)
What is disposable Income?
YD, induced consumption
What is autonomous consumption?
Doesn’t depend on Real GDP basically how much we would consume if Real GDP=0
What causes the Shifts of the Consumption Function?
Wealth: value & amount of Income you own increased wealth = increased AC
Optimism: Expectations about the future therefore, increased optimism = increased AC
Describe a consumption function graph?
Vertical axis: Desired Consumption
Horizontal axis: Real Disposable Income (YD)
45 degree diagonal line where YD=_C
Then a diagonal _c line when the slope is mpc =o.8
What are the left and right sides of the consumption function?
The left side is where private savings <0
Right side: private savings >0
What is the progression of equations for private savings?
S=YD-C
C=_C+mpcYD
S=YD-_C-mpcYD
S=YD(1-mpc)-_C
What is equilibrium in the consumption function?
Yequilibirum: Savings =0
When is disposable income just equal to real GDP?
When there is no tax
What is disposable income equal to?
YD= _c/(1-mpc)
What is the private investment Function?
The desired or planned investment expenditures by all firms
What is investment today?
A function showing the current costs and future expected benefits
What is important to remember about ALL planned investment??
All planned investment is autonomous: IP=I
Because it doesn’t depend on real GDP but it does depend on future GDP
What causes a change in Investment?
Real interest rates: increased Real i = decreased Investment cuz price is higher
Business confidence in future GDP: Increased optimism = increased investment
What does the planned Aggregate Expenditure graph look like?
PAE=y axis
Real actual GDP=x axis
Same 45 degree line
_c notch on y axis
Above that _c+_I notch where you draw the diagonal PAE line & signal that the combination of the two notches is PAE
Where PAE coincides w/ 45 degree line is the vertical line of Yeq
Describe the graphs of the PAE function?
PAE>Y = left side
PAE
What is the equation for PAE?
PAE=Y
PAE=C+I
= _C + CYP + _I
= _C + mpcY + _I
What is equilibrium GDP in terms of PAE?
It’s Potential GDP & it’s when Production = Expenditure
PQ: If current inventory = 11,000 vehicles
Planned inventory = 12,000
From Jan-March we sell 3,000 more cars than anticipated (Assume 0 changes in production yet)
What is the actual investment?
How should production change?
April 1 inventory: 12k - 3k = 9k
Actual🔺in inventory:
9k-11k = -2k
Unplanned 🔺 in inventory = -3k
we want to increase production
