Macro Economics notes

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Aggregate Expenditure (AE);
AE = C + I + G + X – IM
I, G and X: autonomous expenditures
Do not change with change in national income (Y)
C and IM: induced expenditures
Change with changes in national income (Y)
Simple case:
Only at C and I
No government
No foreign sector
AE = C + I
[C] Keynesian consumption function:
Relationship between C and variables that influence it
In simple case:
C is influenced by disposable income

Desired Consumption Expenditure (C)
Disposable income: Either consumed (C) or saved (S)
Consumption is determined by current real disposable income (Yd) Ceteris paribus
Simple Keynesian consumption function:
C = a (bar) + bYd
Where “a” is autonomous consumption expenditure
bYd is induced consumption expenditure
Ex. C = 40 + 0.8Yd
If Yd is 100: C = 40 + 0.8(100)
= $40 + $80 = $120

Slope of consumption = b = 80/100 = 0.8
Slope of 45* line is 1

Marginal Propensity to Consume (MPC) *this is the “b” term: change in desired consumption divided by change in disposable income slope of the consumption function: MPCyd = delta C / delta Yd This case

MPCyd = 80 / 100 = 0.8
Yd increases by $100
C increases by $80
MPC (0.8) is constant since slope of the line is constant
Average Propensity to Consume (APCyd) :
Total consumption divided by total disposable income (WILL BE ON TEST) APCyd = C / Yd
APCyd falls as level of income rises

Savings Function:
Marginal propensity to save (MPSyd):
Change in desired saving divided by the change in disposable income MPSyd = delta S / delta Yd
Average Propensity to save APSyd
Total desired saving divided by the total disposable income
APSyd = S / Yd
Yd is either consumed or saved:
APC + APS = 1
MPC + MPS = 1
All other changes affecting C
Shifts the consumption function
If wealth increases, spend more at every income level, shift consumption function Ex. If wealth increases:...
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