MGEB05H3 Study Guide - Midterm Guide: Fixed Investment, Consumption Function, Autonomous Consumption
Document Summary
Gdp (y) measures 3 things simultaneously: total income of the economy, total expenditure of the economy. 3) total output of goods and services produced. Gdp = y = c + i + g + nx. : 1) consumption (c): spending by households on goods and services. C = c(y - t), where (y - t) = disposable income . Consumption function: c = c0 + b(y - t) + c2r where c0 = autonomous consumption. = mpc = marginal propensity to consume, 0 < mpc < 1: investment (i): business fixed investment + residential investment + inventory investment. Investment function: i = i0 - dr, where i0 = autonomous investment: government spending (g): spending by government but excludes transfer payments. Taxes in b06 are interpreted as net taxes = tax revenues - government transfers. Government budget balance: t - g = 0. Net export (nx): nx = ex im (in the long run classical model, we assume nx.
