lecture 1

Question 1

g

Answer 1

government spending (not including interest payment or government transfers)

Question 2

i

Answer 2

also known as fixed investment. The sum of residential and non residential investment. inventory investment is difference between production and sales.

Question 3

Z = C + I + G + (X-M)

Answer 3

total demand for goods. we assume all firms produce the same good that can be used by anyone. we also assume the economy is closed in which case X = IM = 0. We assume firms are willing to supply any amount at price P.

Question 4

C = C(Yd)

Answer 4

consumption function, a behavioural equation. Yd = disposable income. Also written as C = c0 + c1(Yd) where c1 = MPC and c0 is the intercept of the consumption function. Yd = Y-T

Question 5

Exogenous variables

Answer 5

For example, investment, government spending and taxes. is not explained/depends on other variables in the model.

Question 6

effects of increase in autonomous spending

Answer 6

increase in demand leads to an increase in production and a corresponding increase in income. The resulting increase in output is larger than the initial shift in demand (factor equal to the multiplier).

Question 7

saving

Answer 7

the sum of private (S) + public saving (T - G). S = Yd - C, S = Y - T - C.

Question 8

I = S + (T-G)

Answer 8

IS relation. What firms want to invest must be equal to what people and the government want to save.

Question 9

Paradox of saving

Answer 9

also known as the paradox of thrift. When people attempt to save more and there is a decline in output and unchanged saving. S increases, C and D decrease, excess supply, lower production and income