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CHAPTER 12

CHAPTER 12. Measuring Economic Activity. Chapter Outline. Components of aggregate expenditures C + I + G + (X-M) Personal Consumption Expenditures (C) Factors affecting consumption Relation between consumption and income MPC, MPS Gross Private Domestic Investment (I)

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CHAPTER 12

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  1. CHAPTER 12 Measuring Economic Activity

  2. Chapter Outline • Components of aggregate expenditures C + I + G + (X-M) • Personal Consumption Expenditures (C) • Factors affecting consumption • Relation between consumption and income • MPC, MPS • Gross Private Domestic Investment (I) • Factors affecting (I) • Investment function

  3. Chapter Outline Cont… • Government Expenditures • Fiscal Policy • Government function • Net Exports • Exports, Imports and net exports function • Aggregate expenditure function • Equilibrium level of income and output • Changes in equilibrium

  4. Short-run Model Y= C + I + G + (X-M) ~ open economy Y= C + I + G ~ Keynesian framework • The Focus is on the short-run. “In the long-run, we are all dead” -Keynes • The theory was developed after the Great Depression

  5. Consumption Function Factors affecting personal consumption C= f[ Y, Tp,r, CC, W, CR, D] Y= disposable income Tp= personal taxes r = real interest rate CC = consumer confidence W = wealth CR = availability of consumer credit How are these Variables related to consumption?

  6. C C C C MPC = < 1 Y Y C

  7. Gross Private Domestic Investment Keynes assumed autonomous Investment Autonomous Investment Induced Investment C I I I Y Y

  8. Government Expenditures G Autonomous Government Expenditures G Y

  9. Net exports & Currency exchange rate N= [ E-M] Exports – Autonomous Imports – a funtion of domestic real Imports Exports m M= M0 + m1Y M

  10. Aggregate Expenditures C + I + G + (X-M) Y Assumes that consumption is the only component that varies with income. Equilibrium= E=Y Agg. Exp=Agg. output E A E 45o Y O Planned and unplanned inventories

  11. Change in Equilibrium Y E2 B E1 A I O Y Y

  12. Multiplier • Relation between change in investment and change in income M= Y Multiplier can be defined as : m= 1/1-MPC I Y = m * I

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