National Income

Wage

Price of L

Rental rate

Price of K

W

Nominal Wage

R

Nominal rental rate

P

Price of output

W/P

Real wage (measured in units of output)

R/P

Real rental rate

Total Labor Income

MPL * L

Total Capital Income

MPK * K

National Income

MPL * L + MPK * K

α

Capital’s share of total income

Cobb-Douglas Production Function

Y = AK^αL^1-α

Disposable Income

Total income minus total taxes

Consumption Function

C = C(Y-T)

Marginal Propensity to Consume (MPC)

The change in C when disposable income increases by one dollar

r

Real interest rate

Investment function

I = I (r)

Aggregate Demand

C(Y-T)+I(r)+G

Aggregate Supply

Y=F(K,L)

Private Saving

(Y-T)-C

Public Saving

T-G

National Saving (S)

Y-C-G

Budget surplus

T>G

Budget deficit

T<G

Balanced budget

T=G

MPK