ECON 2000 Lecture Notes - Lecture 42: Consumption Function, Autarky, Keynesian Cross
14 May 2018
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ECON 2000
Lecture 42
Planned Expenditure
Actual expenditure – amount households, firms, and gov’t spend on
goods and services
o Equals economy’s GDP
Planned expenditure – amount households, firms, and gov’t would like
to spend on G&S
Difference between actual and planned expenditure = unplanned
inventory investment because sales do not meet their expectations
o Because unplanned changes in inventory counted as investment
spending by firms, actual expenditure can be either above or below
planned expenditure
Now consider determinants of planned expenditure (closed economy, no
NX):
o I = planned investment
o PE = C + I + G = planned expenditure
To this equation, we add consumption function:
o C = C(Y – T)
For now, we assume planned investment is exogenous: I =
Also assume that fiscal policy—levels of gov’t purchases and taxes—is
fixed: G =
, T =
Combination of these five equations:
o PE = C(Y –
) + +
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