ECON 1102 Lecture Notes - Lecture 6: Output Gap, Potential Output, Consumption Function

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Econ 1102 - lecture #6 - chapter 21 continued and chapter 22. Investment = 100 (this function is exogenous and on a graph, the function is flat) Marginal propensity to consume = 0. 8: the greater the income, the more we consume - the function is upward sloping. Ae = 120 +0. 8y: without any income, the desired expenditure is , in the short run, price levels are assumed to be constant, the only way for the economy to adjust is to adjust production levels. Y = 120 + 0. 8y (1 0. 8)y = 120. Assume that autonomous spending (a) increases to (+30): Economic fluctuations as self-fulfilling prophecies: households" a(cid:374)d fir(cid:373)s" e(cid:454)pe(cid:272)tatio(cid:374)s a(cid:271)out the future state of the e(cid:272)o(cid:374)o(cid:373)(cid:455) i(cid:374)flue(cid:374)(cid:272)e desired consumption and desired investment. How large is the actual multiplier effect: multiplier may be close to zero because of income taxes, inflation, purchase of imported goods. Chapter 22: adding government and trade to the simple macro model.

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