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

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School
Dalhousie University
Department
Economics
Course
ECON 1102
Professor
Boulatoff

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Document Summary

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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Related Questions

The following is a model of a closed economy with nogovernment.
C = 44 + 0.6YD I = 12

where C = desired consumption expenditure (in billions of $), YD =disposable
income (in billions of $), and I = desired investment expenditure(in billions
of $).

a) What is autonomous C equal to?
b) What is induced C equal to if national income (Y) is 120?
c) What would happen to C if Y increased by 10?
d) What is the saving function equal to?
e) How can private saving (S) be negative? Explain.
f) What would happen to S if Y increased by 10?
g) At what level of Y is the average propensity to consume (APC)equal to 1?
h) How does the APC change as Y increases?
i) How does the average propensity to save (APS) change as Yincreases?
j) What is aggregate expenditure function equal to?
k) Is the economy in equilibrium when Y is 150? If no, then by howmuch are
the economy’s inventories changing?
l) What are the equilibrium levels of Y, C, S, and YD?
m) At equilibrium, what do the injections and the withdrawals inthis
economy equal?
n) Give two reasons why investment would change from I = 12 to I =18.
o) What are the new equilibrium levels of Y, C, S, and YD ifinvestment
changed from I = 12 to I = 18?
p) What is the size of the (simple) multiplier?
q) What is the change in Y in the 3rd round of the multipliereffect as a
result of the change in investment in part n?

On the planet Omicron Persei 8, government spending is $1000, net taxes are $1200, and planned investment is $1400. Consumers spend according to the equation C = 100 + 0.8Yd, where Yd represents disposable income. Given this information, fill out the table below to determine which of the output levels represents a macroeconomic equilibrium, then answer the questions that follow. Output (Income) Y Net Taxes T Disposable Income Yd Consumption C Planned Investment I Government Purchases G Planned Aggregate Expenditure AE Unplanned Inventory Change 6200 1200 5000 3850 1400 1000 6250 -50 6700 1200 5500 4225 1400 1000 6625 75 7200 1200 6000 4600 1400 1000 7000 200 7700 1200 6500 4975 1400 1000 7375 325 8200 1200 7000 5350 1400 1000 7750 450

An a. Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on inventory levels.

b. Is the government budget balanced, in deficit, or surplus, and by how much? Since the government is spending less than it is collecting in taxes, we are showing a surplus.

c. Find the marginal propensity to consume, and the marginal propensity to save. d. Find the government spending multiplier. If the government wanted to increase the equilibrium level of income by $1,000, how much would it have to increase government purchases? e. Find the tax multiplier. If net taxes were lowered by $100, what effect would it have on the equilibrium level of income? Give a specific numerical answer.