UNC-Chapel Hill ECON 101 - Consumer Spending & Demand; Demand-Side Equilibrium; Multiplier Analysis (3 pages)

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Consumer Spending & Demand; Demand-Side Equilibrium; Multiplier Analysis

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Consumer Spending & Demand; Demand-Side Equilibrium; Multiplier Analysis


Chapter 25 and Chapter 26

Lecture number:
Lecture Note
University of North Carolina at Chapel Hill
Econ 101 - Introduction to Economics
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ECON 101 1st Edition Lectures 13 Consumer Spending Demand Demand Side Equilibrium Multiplier Analysis Chapter 25 Aggregate Demand total amount that all consumers firms government agencies and foreigners spend on US final goods and services schedule not a fixed number Consumption 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 capital Depends on interest rate high interest low investment low interest high investment Planned Investments business purchases of machines capital that can be used for further production Unplanned 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 Consumption Change 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 income Money fixed asset asset with fixed dollar value Permanent income tax cuts stimulate spending better than temporary cuts of equal magnitude since permanent 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 EQ Total Spending cannot exceed total output b c will notice inventory depletion May decide to increase production or change prices later on Total Spending cannot be less than total output b c inventory will pile up May 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 spending Induced 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 schedule Can only be drawn for specific price level if prices change EQ GDP demanded changes Higher prices reduce AgD lowers purchasing power lowers C Lower 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 consumers do 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 change in GDP Y I only for investment 11 b Y where is any changed variable investment gov t spending etc 11 bis the multiplier 800 200 4 For every additional dollar of investment added 4 dollars of GDP growth will occur required reserve ratio Induced Increase in Consumption increase in consumption due to increase in consumer income Autonomous 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 level of GDP on the demand side in the same direction but by a multiplied amount

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