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Econ 4.3
Monday, February 22, 1999
Announcements: Homework Assignment #3 is
posted on the webpage and is due on Wednesday. The Chapter 8 and 9 quizzes
are online. The next exam will be Friday, February 26th. Voluntary Pre-Exam
Review Session, Thursday, February 25, in 110 Wartik; 6:30 - 8:25 PM.
Heather Zackal, the TA, will have a temporary change in her office hours.
They will be Wednesday from 2:00-3:30.
Lecture notes:
GDP Determination
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Income, consumption, relationship
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Income and Consumption hypothesis
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Income, consumption and saving
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Consumption Function
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Marginal Propensity to consume
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Saving Function
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Marginal propensity to Save
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MPC and MPS relationship
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Investment determinant
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Preliminary Keynesian Models
GDP and Consumption
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Close statistical relationship
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Consumption is under GDP
Disposable Personal Income and Consumption
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Closer relationship
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Consumption is under DPI
JM Keynes, Fundamental Law of Consumption. General
Theory. P.96.
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John Keynes wrote General Theory of Economy,
one of the most influential books of this century
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First one to have major original insight into why economy
might get stuck into equilibrium quantity of a less than full economy
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"The fundamental psychological law upon which we are entitled
to depend with great confidence both a priori from our knowledge
of human nature and from the detailed facts of experience is that men are
disposed, as a rule and on the average, to increase their consumption as
their income increases, but not by as much as the increase in their income."
Consumption, Saving, Disposable Income (Annual, $ Billions)
| Y=actual expenditure on output |
C=consumption |
S=saving |
| $0 |
100 |
-100 |
| 100 |
175 |
-75 |
| 200 |
250 |
-50 |
| 300 |
325 |
-25 |
| 400 |
400 |
0 |
| 500 |
475 |
25 |
| 600 |
550 |
50 |
| 700 |
625 |
75 |
| 800 |
700 |
100 |
| 900 |
775 |
125 |
| 1000 |
850 |
150 |
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GDP increased by 100 billion each time
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Consumption rose at an initial rate of 75 billion
Level of Negative Saving
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Consuming less than prodcing
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C(Y) = a + bY
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C(Y) = $100 + bY = $100 + (change in C / change in Y)(Y)
Marginal Propensity to Consume (MPC)
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change in C / change in Y
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C(Y) = $100 + (change in C / change in Y) (Y) = $100 + 75/100
(Y) = $100 + .75(Y)
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Average desire to save, if people become less thrifty, people will consume
more, thus savings go down
Marginal Propensity to COnsume (MPC)
Data
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MPC - that fraction of a change in income that is consumed or spent
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MPC = Change in Consumption / Change in Income
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MPC = $350-275 / $400-300 = $75 / $100 = .75
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Money Illusion: Use of nominal instead of real dollars to measure income
and wealth changes
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Uncertainty, Speculation, Shortened Decision time horizon
Marginal Propensity to Save (MPS)
Data
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MPS - that fraction of a change in income that is saved
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MPS + MPC = 1
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MPC = Change in Saving / Change in Income
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MPC = $75-50 / $400-300 = $25 / $100 = .25
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1 - MPC = MPS = change in S / change in Y
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C = a + bY ----> b = MPC
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