ECON 1113 1st Edition Lecture 11 Outline of Last Lecture I The Keynesian Consumption Function A Numerically B Graphically C Mathematically D Shifts in the Consumption Function E Case Study II Stock Market Crash of 1987 Outline of Current Lecture I Review of Previous Lectures II Keynesian Cross Model Current Lecture I II Review of Previous Lectures A Inflation increase in the cost of money and effects B Planned TE reflects the entire economy 1 Determinants of Planned TE are summarized in the equation consumer spending investment spending government spending export spending import spending or Planned TE C I G X M C Consumption Function C Ftn Model 1 The x axis represents disposable spending Yd and the y axis represents consumer spending C 2 A reference line forms a 45 degree angle from the origin of the graph 3 The C Ftn does not slope as quickly as reference line and does not begin at the origin Keynesian Cross Model A Planned Total Expenditure PTE Diagram 1 The y axis is defined by PTE C I G X M however I G X and M remain constant for the purpose of this graph while C may change 2 Keynesian Aggregate Supply denoted by the ASK line which begins at the origin and continues at a 45 degree angle upward a A form of the supply curve in this diagram b Represents the amount of goods and services suppliers are willing to produce 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 3 Planned Total Expenditure denoted by the PTE and its equation line which begins above the origin on the y axis and does not retain as steep of a slope a A form of the demand curve in the diagram b Represents the amount of goods and services buyers are willing to consume 4 Inventory Adjustment Mechanism the movement of a disequilibrium in the market balancing itself and reaching the equilibrium level of nominal GDP in this instance Planned Total Expenditure PTE Graph AS k PTE C I G X M PTE C I G X M in dollars 16 14 12 10 8 6 4 2 0 0 2 4 6 8 10 12 14 16 Y meaning nominal GDP in dollars 5 If the nominal GDP is below equilibrium a shortage will occur 6 If the nominal GDP is above equilibrium a surplus will occur B Y national target income for nominal GDP 1 Non inflationary full employment level of GDP 2 Two possibilities a Fiscal Policy fixes macro economic problems through government expenditure G policy and taxation T policy b Ye equilibrium nominal GDP Y i Unemployment results so the policy recommendation is to increase the PTE ii To increase the PTE increase the determinants as components of PTE iii As G increases PTE increases iv As T decreases disposable income Yd increases thus consumer spending increases c Ye Y i Inflation results so the policy recommendation is to decrease the PTE ii To decrease the PTE decrease the determinants as components of PTE iii As G decreases PTE decreases iv As T increases Yd decreases thus consumer spending decreases C Further Explanation 1 An increase in the PTE line displays as increase in incomes which acts with a ripple effect 2 The Multiplier Concept a ratio a Government Multiplier mG the change in nominal GDP divided by the change in government spending or the subsequent equation in which MPC is the marginal propensity to consume Y 1 b G 1 MPC c Example i MPC 0 8 ii 1 1 0 8 5 iii This means that when G increases by 1 PTE or the nominal GDP increases by 5 Y 5 thus when Y 100 billion G 20 billion iv G or 1 5 of the PTE d Taxation Multiplier mT the change in nominal GDP divided by the change in taxation or the subsequent equation in which MPC is the marginal propensity to consume Y MPC e T 1 MPC f Example i MPC 0 8 ii 0 8 1 0 8 4 iii This means that when T decreases by 1 PTE or the nominal GDP decreases by 4 Y 5 thus when Y 100 billion T 25 billion iv T or 1 4 of the PTE
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