7/28/2019 Econ Topic 7-5-15

1/11

Ecoojcs-rop 7Consumption

A consumpton functon showsthe re1ationsh betWeen planned oonsumptoneenditure and inGOme in an ecOnomyA lhear conslmptonI:i1mdon cm be expressed as follows 1=a bY umginal propens n

bY induced oonsumption expenditure the change h C when there an hcrease in$1ofY,C/Y

^C0' lQo

y

0

C

6

nY

maneozIle)Wea1th

7/28/2019 Econ Topic 7-5-15

2/11

Y

'o,,~

B Investnent An hves ent fmon shows e reJa /esenrae andcome an econom

nn

AD

{ !' 1

The reve fhvesenris h uend by interest mte orinme For I0typuvose,we assume as an autonomous v iaue C Ler on,we wmreIax ds assumpJonhvese fmction can e expresse1

(ooo/la

C Equilibrh 1 'Y e or45 eIt shows allthe points where aggregate expenditure CAD,equals h ome All the along the45 hne hdceY=AD

?tC"' ItJQ P

7/28/2019 Econ Topic 7-5-15

3/11

B%sess EcoaJ roJ,fc7Aggregate expenditurectionAn aggregate expenditure mction shows the relationsh p between plarlned aggregate

expendimre and income1n an economyPlanned aggregate expend" Fe is the sun1ofplanned conslImption and planned

invest1mentCven:C=a+bY andI=IAD=a+bY+IAD=0+I )+bY

7/28/2019 Econ Topic 7-5-15

4/11

Icome deternation The equilibritIm level ofincOme CYe) atthe level ofincome where Y AE

AD

AD (a+I)+bY

\at Y1:plamed expend u>income hventories fl.1..s increase production to neetthe extra demand and to rnaIntah e hventory

stocks Y Co Ye)

at Y2:expenditure(incomeinventorieso n..s decrease production Y Co Ye)

Y2e1

7/28/2019 Econ Topic 7-5-15

5/11

Bzsjness Eco os-roJ, 7 Movement along the clrve

Dueto Y movement alonge AD ctrveAD

L/) / )shift ofthe AD clIrve due to the change in wealth,expected pri level or avolab ty ofcredt,etc

larger b:1he slope ofthe consunption function bec 111es steeper ``-;^ |D

Rotation ofthe clrve ^ methe AD ct rve sma11er b es1ope ofe consunption func

shift of e clrve

7/28/2019 Econ Topic 7-5-15

6/11

Bs EcooJcs-rThe multip erAn autonomous change in aggregate expendinre wm Iead t a multpher ce in1ncome.

one person s expendi becomes another person income The increase in autonomousexpendewill hitiate consumption spendine second,ird,fo romdssupposeere is an increase ofautonomous expenditwe by$1and b=o.8Romd Increase in spending CtImulathe total

I

2345

1

0.80.640.512

o4096

1

1.82.442.9523.3616

Total

The cumulative slIm ofincrease in spending is:=$1+1(0.8)1+1(0.8)2 1(0.8)3+ +1(0.8)=1/(1-0.8)=5

The greatere value of b,the greater 11be the propo tion of the initiaI increaseincome spent ine seGOnd,third,foHh rounds, Hence, he larger the changeincome.The pwpose of e mult lr to calculate the ma.g"de ofincome change at resultsfrome`autonomous change in the aggregate expend"vreM0lerk,=Changeih hGOme/Cha e in aut nomous expenkY/AA 1/(1~b) {PG

,

Th

Deo Ex

Behavr ([:;1,

zh

Gove

o

7/28/2019 Econ Topic 7-5-15

7/11

sJ Eco,s-rt,fc7IV Three-sector Model

There are three sectors-fl s,households and thc govementThe role offoreign sector is ignored

Deflnition equatio s EXpendies are on C,Iand G

+ With a govennent sector,households have to pay taxes(T) Income recoved by

households used for consumpton(C)or saving6)as well as payhg taxes(T).E)isposable income=hcOme-taX+goVerlment subsidy

/a J

Yd=Y-Tsubsy can be regarded as a negat e taxBehavioural f ctiosr c ,FrJ9 B9dtre/JJJJ

PmFJJ9 c:o,9

The govementexpendvFe function is an exogenous or auto omous fmCtion.The arnunt ofgoven.nent expen Ii eL )

@/ can be considered asthe amomt oflump su n taXestY is the amount ofpropoHionalincome tax whereas t is the lnarghaltax rate

o T/YGover

;ls a dec"budget s1.rG(T, e surphs budg If C;=T,there is a balance budget

7/28/2019 Econ Topic 7-5-15

8/11

B ss Ec -Top 7 BsJss Govemme t and aggregate demandF c ,rdbcmgJ g,,Brm B,9J em @JJfp

cJr cJ9gB fJJr rcJF o,BrfpJJfAD=Y

Fiscal p| It d

eGO11 It

to sloutp

ADADAD

lWu o MP % cD gcforg, J spegc,9J JJpJJf

?x\tr

7/28/2019 Econ Topic 7-5-15

9/11

BoJsss Ecoa -rp'c7Fiscal po cy

It refers to the use of goven nent eXpend vne and taxation to achieve certain goals in theecOnomy,such as high eInplo e,pce stab,and so onR involves an exp c change in goverrment expenditure and taxation pohcies in orderto staJoiIe the level of aggregate demand close to the potenthl or hll-employmeoutput level When a denati nar/ or recessionary gap exists, the gover1ment can raise the

aggregate expend"ure by inoreasing expend ue, by reducing taxes, or by bothmeasures

)AD Y.u Yd C

AD=YADAD

Ye Ye =Yf

to Yf E Y to Yf

Y

PCD

7/28/2019 Econ Topic 7-5-15

10/11

Bmsess&o -roP 7 BaJsJss. Fo

DelJ Expe1

Beha0.

t

p@When an hnatnary gap exists,the goverrunent can lower the aggreg e expendeby reduchg expendture,by increasing taxes,or by both measures. AD Y to Yf Yd C E Y to Yf

AD

Ye =YfYe

Ab

7/28/2019 Econ Topic 7-5-15

11/11

Jzsess Ecoos-ToP'c7 Fol rsector Model

Four sectors-flIIs,households,govementand1he ore sectors

Deio equatio sExpenditures are on C,I,G and NXAD C+I+G+(X-~o

BehaviouraI f ctionsJ:c:o99

R is assl med thatthe amount of eXports1s a ConstantThe a1nomt of exports only a functon of the income ofe forelgn comtr se $ Q

rnporJrJJ `

b,/F~ M=M +

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

M a constantdm MP AM/ Pc

AD