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23 Cards in this Set
- Front
- Back
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COMPONENTS OF DEMAND: What is Consumption?
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Notation: C
70.5% of GDP is Consumption Goods and Services purchased by consumers |
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COMPONENTS OF DEMAND: What is Investment?
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Notation: I
12% of GDP is Investment Physical capital purchased by firms or consumers |
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COMPONENTS OF DEMAND: What is Government Spending?
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Notation:G
>20% of GDP is Government Spending Goods and services purchased by the government |
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COMPONENTS OF DEMAND: What are Imports and Exports?
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Notation: IM & X
>2.50% of GDP is Imports and Exports Goods and Services either produced outside the U.S. but consumed inside the U.S. (Imports) or produced inside the U.S. and consumed outside (Exports) |
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What is inventory investment?
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The difference between the goods sold and the goods produced in a given year.
Inv. Investment= Production - Sales |
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What is demand and its formula?
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The relationship between amount of goods desired and prices
Notation: Z Z= C + I + G + X - IM |
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What are some assumptions of The Goods Market?
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1) All firms produce the same good
2) Firms are willing to supply any amount if the good at a given price level 3) The economy is close, so X=IM=0 4) Firms do not build inventories Now demand is: Z= C + I + G |
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What is disposable income?
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The income that remains once consumers have paid taxes.
Notation: Yd |
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Define Consumption in terms of disposable income.
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C = C0 + C1(Yd)
C0= Autonomous consumption C1= Marginal propensity to consume Yd= Y-T So.... C = C0 + C1(Y-T) |
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What is the difference between and endogenous and exogenous variable?
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Endogenous- A variable explained by the model
Exogenous- A variable not explained by the model |
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What are the components of fiscal policy?
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This is government spending with 2 components:
1) G: Government purchases of goods and services 2) T: Collection of Taxes Both are exogenous |
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What are our equations for equilibrium?
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We know:
Z= C + I + G We define C: C0 + C1(Y-T) So.... Z= C0 + C1(Y-T) + I +G Equilibrium is Z=Y (Demand=Production) Y= C0 + C1(Y-T) + I +G |
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Solve Th Goods Market Model (Using math)
Start with: Y= C0 + C1(Yd) + I +G Finish with: Y= [1/(1-C1)]*[C0 - C1T + I +G] |
Y= C0 + C1(Yd) + I +G
Y= C0 + C1(Y-T) + I +G Y= C0 + C1Y -C1T + I +G (1-C1)Y = C0 - C1T + I +G Y= [1/(1-C1)]*[C0 - C1T + I +G] |
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What is the multiplier in the Goods Market?
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The ratio of the change in an endogenous variable to the change in an exogenous
Formula: 1/(1-C1) |
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Define notations in The Goods Market.
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Y= Output
C0= Autonomous Consumption C1= Marginal Propensity to consume T= Taxes I(I-bar)=Investment G=Government |
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What is the slope and intercept in the Demand formula for The Goods Market?
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Z= [C0 + I +G - C1T] + C1Y
Intercept (Autonomous Spending): [C0 + I +G - C1T] Slope: C1Y |
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What is the difference between EXCESS DEMAND and EXCESS SUPPLY?
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Excess Demand:
Z > Y Excess Supply: Z < Y |
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Why do we care about output?
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1) Output=Income
2) Okun's Law 3) Phillip's Curve |
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What is the Alternative Goods Market Model
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Investment depends positively on Yd (Disposable Income):
I = I(Yd)= i0 + i1(Y-T) So... Y= C0 + C1(Y-T) + i0 + i1(Y-T) +G We can solve: (1-C1-i)Y= C0 + C1T - i1T +G Y= 1/(1-C1-i)[C0 + i0-(C1+ i1)T +G] |
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What are Private Savings?
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Saving by consumers.
S=Yd-C S = Yd-C = Y-T-C |
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What are Public Savings?
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T-G
If T>G then there is a surplus If T<G then there is a deficit |
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What is the Income-Spending relation (IS)?
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I=S+(T-G)
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What does the graph look like?
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Y-axis= Y,Z
X-axis= Y 45degree ZZ (PRODUCTION) line Production line just above ZZ line with an interception with ZZ |
