ECON 101 1st Edition Lectures 12 Consumer Spending & Demand; Demand-Side Equilibrium; Multiplier AnalysisChapter 25: Aggregate Demand: total amount that all consumers, firms , government agencies and foreigners spend on US final goods and services. schedule, not a fixed numberConsumption: total amount spent by consumers on newly produced goods and services (homes are excluded) Investments: flow of a firm’s resources into the production of new capitalDepends on interest rate→ high interest= low investment low interest= high investment Planned Investments: business purchases of machines/capital that can be used for further productionUnplanned Investments: additional inventory/capital for spikes in demand Government Spending: anything the govt spends money on (taxes, infrastructure, education etc; often assumed to be exogenous)AgD = Consumption + Investments + Government Spending +Net Exports (Exports-Imports) AgD= C+I+G+ (Ex-Im)G = f(Y) it can be any function of Y. If you want to write down a linear function of G, it would be G=Gbar+g*Y, but it can be anything!! *** Just a reminder, do not spend time remembering formulas for equilibrium conditions or multiplier, the important thing is to UNDERSTAND how they are derived and how you can get the right answer given any type of setup.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.MPC=∆Consumption/∆Yd that produces change in C Factors that Shift ConsumptionChange in price (Yd) causes movement along demand schedule Change in other factors moves schedule upwards or downwards Personal Savings rate: ratio of consumer saving to disposable incomeMoney fixed asset: asset with fixed dollar valuePermanent income tax cuts stimulate spending better than temporary cuts of equal magnitude sincepermanent taxes are a much bigger “future income expectation”Exports rise when GDP rises and vice versa. (NOT imports, since Y=C+I+G+(EX-IM))Chapter 26:Equilibrium: the point at which consumers and firms have no incentive to change their behavior Demand EQTotal Spending cannot exceed total output b/c will notice inventory depletionMay decide to increase production or change prices later onTotal Spending cannot be less than total output b/c inventory will pile upMay decide to decrease production or lower prices EQ: total spending = production→ no reason to alter production schedule Expenditure Schedule: shows relationship between national income (GDP) and total spendingInduced Investment: the part of investment spending that rises when GDP rises and falls when GDP falls Exogenous spending is spending that occurs outside of our [macroeconomic] economy (this is not exactly correct, exogenous spending refers to any spending that is not dependent on macro variables. I think some of the TA has used this term while others have not) Spending that develops from external factors. “Given from God” according to one of the TAs. (don’t worry, we will be clear in the exam)45 degree diagram (income-expenditure diagram/Keynesian cross): shows equal income and expenditure moving across a demand scheduleCan only be drawn for specific price level→ if prices change, EQ GDP demanded changesHigher prices→ reduce AgD→ lowers purchasing power→ lowers CLower Prices→ Increases AgD→ raises purchasing power→ increases C AgD Curve→ shows quantity of domestic product that is demanded at each possible value of the price level The economy will reach equilibrium at full employment on the demand side only if the amount that consumers wish to save out of their full employment incomes happens to equal the amount that investors want to invest: if these values are unequal, full employment will not be equilibrium.Coordination failure→ Party A would change their behavior if Party B would change theirs and vice versa, but the changes do not happen because A and B do not communicate coordinately.***Its easier to think of it as the fact that recessionary/inflationary gaps occur because consumersdo not coordinate their saving with investor’s investing, so the government struggles to take the appropriate action in order to prevent gaps from potential GDP Multiplier→ ratio of change of EQ GDP (Y) divided by original change in spending that causes changein GDP∆Y/∆I→ only for investment 11-b=Y, where α is any changed variable (investment, gov’t spending, etc.)11-bis the multiplier800/200→ 4For every additional dollar of investment added, 4 dollars of GDP growth will occur /requiredreserve ratioInduced Increase in Consumption→ increase in consumption due to increase in consumer incomeAutonomous increase in consumption→ increase in consumption without an increase in consumer income→ shifts entire function upward by the SAME slope (can be caused by decrease in taxes, lower interest rates etc.) \(higher Y-intercept)Changes in volume of government purchases of goods and services will change the equilibrium levelof GDP on the demand side in the same direction, but by a multiplied