EQULIBRIUM IN GOODS MARKET

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Consupmtion (C), Investment (I), Gov’t Purchases (G), Net Exports (NX)

The 4 components of GDP

PCE = Y = C+I+G

Equation for Personal Consumption Expenditure

income (Y), taxes (T)

Households receive ____ from their labor and their ownership of the capital … they pay ____ to the government

Disposable income (Y-T)

Income net of taxes is referred to as

disposable income, consumption

Consumption decisions are made using ____ _____, thus we have the ____ function: C = Ĉ(Y-T)

number of goods and services consumed

consumption function

C = _________

Ĉ = _______

(Y-T)

C

increases

x = ___

y = ___

When (Y-T) increases, consumption ____

Marginal Propensity to Consume (MPC)

the amount by which consumption changes when disposable income increase by 1 dollar

equal, income

The change in consumption is ____ to the MPC times the change in ___.

ΔC = MPC⋅ΔY

Consumption function

C = Co+MPC(Y-T)

autonomous consumption

how much is consumed if income = 0

aggregate savings (S)

the part of aggregate income that is not consumed … S=Y-C

Marginal Propensity to Save (MPS)

the fraction of a change in income that is saved … __ = 1-MPC

all of the above

What could consumption depend on?

investment goods

both firms and households purchase

add, capital, existing

Firms buy investment goods to ___ to their stock of _____ and to replace _____ capital as it wears out

new houses

Households buy ___ _____, which is also part of investment

Total investment

____ _______ in the U.S averages aoput 15% of GDP

interest

measures the cost of the funds used to finance investment

planned, interest

the quantity of ____ investment goods demand depends on the ____

the return must be greater than the interest rate

What makes an investment profitable?

planned investment (I)

those additions to capital stock and inventory that are planned by firms

actual investment (I^a)

the actual amount of investment that take place; it includes items such as unplanned changes in inventories

inventory

the stock of goods that a firm has awaiting sale

transfer payments

made to households who use them to finance consumption and can be thought of as a negative tax

purchases

only ____ are included in GPD

budget defecit

the difference between what a government spends and what it collects in taxes in a given period

• G-T

G>T

the government is running a defecit, or increasing its debt

G<T

the government is running a surplus, or retiring its debt

exogenously set

we avoid discussion on how the governmnent makes decisions regarding spending and taxes and just assume they are fixed

change, outside

Fixed does not mean that these values don’t ____, it jsut means that their value is determined ____ of the model

Planned Aggregate Expenditure (PE)

THe total amount the economy plans to spend in a given period

• PE = C+I+G

Actual Aggregate Expenditure (AE)

The total amount the economy actually spends in a given period

• AE = C+ I^a+G

planned and actual investment

The difference between planned and actual expenditure is the difference between …

unplanned change in inventory

The difference between planned and actual investment is …