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Cards In This Set
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Z = C + I + G
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Demand for goods, Z, in a closed economy
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What is C stand for?
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Consumption
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What does YD stand for?
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Disposable income
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What is the equation for Consumption?
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C= C(YD) = consumption function (+)or = c0 + c1YDor = c0 + c1(Y-T)
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C = c0 + c1YD
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C1 = propensity to consumec0 = what people would consume if their disposable income were zero
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YD = Y - T
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Disposable IncomeY = incomeT = taxes paid minus government transfers
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Example of exogenous variables
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Investment, taxes, and government spending
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Taxes and Government spending =
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Fiscal Policy
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Equilibrium in goods market =
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Production, Y, be equal to the demand for goods, Z
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Multiplier
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-number which multiplies autonomous spending-closer c1 is is to 1, the larger the multiplier-changes output by more than its direct effect on spending=1/(1-c1)
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Production depends on demand, leads to an increase in production and increase in income
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Leads to further increase in demand, further increase in production...initial is bigger by a factor of the multiplier
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Saving
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Sum of private saving and public saving
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Private saving (S)
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Saving by the consumers= disposable income minus consumption
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Production formula
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I = S + (T-G)(T-G) = public saving
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I S Relation definition
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Investment = Savingswhat firms want to invest has to equal what the people and the gov. want to save
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