Econ 104 1st Edition Lecture 16 Outline of Last Lecture I Aggregate Expenditure II Classic Theory and Keynesian Theory Outline of Current Lecture I Factors that Affect the C function II Example Graphs Current Lecture I II Factors that affect the Consumption C function a Move along the C function i Change in disposable income ii Change in taxes b Shift in the C function a change in the intercept change in graph A i Change in household wealth W ii Change in expected future income Ye iii Change in the price level P iv Change in the real interest rate r Example graphs a A change in taxes i A decrease in income taxes T increases Yd and C increases ii Yd Y T iii C f Yd T iv Suppose 1 C 1 75Yd 2 C 2 5 and Yd 2 at point A 3 Suppose Congress cut taxes which increases Ydto 4 trillion a Yd Y T TR i Plug 4 into Yd 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 b Change in Wealth Assets Liabilities i When W increases the C function shifts up ii C f wealth iii Assets land house shares of stock bonds gold cars etc iv Liabilities mortgage loan credit card debt educational loans car loan etc v EXAMPLE 1 Suppose stock prices climb dramatically as the economy improves which results in an increase in C at every level of Yd a Change in Assets 2 trillion b Original C Function i C 1 75Yd c New C Function i C 3 75Yd III Graph C a Change in future income Ye i C f Ye ii Consumer confidence CC is good proxy for Ye iii If CC is increasing the C function shifts upward iv There are two measures of CC 1 Index of consumer confidence 2 Index of consumer sentiment b A change in the price level P i If the price level increases real wealth decreases and the C function shifts downward ii Real Wealth Year X Nominal Wealth year x CPI 100 iii Suppose interest rate increases from 2 to 4 with the original C function being C 3 75Yd iv The real wealth falls and C goes down by 2 trillion at every unit of Y d 1 C 1 75 Yd
View Full Document
Unlocking...