1907 Ch12-2 The Determination of Equilibrium Output Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY Ch12-2 The Determination of Equilibrium Output
15-2 0 Topics Chapter12 introduced the model of aggregate demand and aggregate supply. ■Long run -prices flexible output determined by factors of production technology unemployment equals its natural rate ■Short run -prices fixed output determined by aggregate demand unemployment is negatively related to output We focus on the short run and assume the price level is fixed. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 15-2 Topics Chapter12 introduced the model of aggregate demand and aggregate supply. Long run – prices flexible – output determined by factors of production & technology – unemployment equals its natural rate Short run – prices fixed – output determined by aggregate demand – unemployment is negatively related to output We focus on the short run and assume the price level is fixed
1907 15-3 12.1 Two Sector Economy ·YaY def:disposable income is total income minus total taxes:Y =Y-T Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 15-3 12.1 Two Sector Economy • Yd=Y • def: disposable income is total income minus total taxes: Yd =Y – T
15-4 0 12.1.1AE 。Notation: C=planned COMSUPTION I =planned investment AE C +I planned expenditure Y=real GDP=actual expenditure Difference between actual planned expenditure: unplanned inventory investment Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 15-4 12.1.1 AE • Notation: C = planned COMSUPTION I = planned investment AE = C + I = planned expenditure Y = real GDP = actual expenditure • Difference between actual & planned expenditure: unplanned inventory investment
490 15.5 © The Consumption Function C=C(Yd), C=a+b Yd APC=average propensity to consume =CYd MPC=△G/△Yb def:The marginal propensity to consume is the increase in C caused by a one-unit increase in disposable income. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 15-5 C=C(Yd ), C=a+b Yd APC = average propensity to consume = C/Y d MPC =△C/△Yd=b def: The marginal propensity to consume is the increase in C caused by a one-unit increase in disposable income. The Consumption Function
15-6 10 Keynes's Conjectures 1.0<MPC<1 2.APC falls as income rises 3.Income is the main determinant of consumption. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 15-6 Keynes’s Conjectures 1. 0 < MPC < 1 2. APC falls as income rises 3. Income is the main determinant of consumption
1907 15-7 c=a+b Ya 6 b=MPC = slope of the consumption function a Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 15-7 C Y 1 b b = MPC = slope of the consumption function c=a+b Yd a
190 15-8 As income rises,the APC falls (consumers save a bigger fraction of their income) c=a+b Yd slope APC Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 15-8 C Y slope = APC As income rises, the APC falls (consumers save a bigger fraction of their income). c=a+b Yd
1907 15-9 C=a+bY 450 Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 15-9 C O Y C=a+bY c a Y E 450
190 15-10 Saving Function S=Y-C=Y-(a+bY)=-a+(1-b)Y APS=S/Y MPS=△S/△Y.=1-b APS+APC=1 MPS+MPC-1 Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 15-10 Saving Function s=Yd-c=Y-(a+bY)=-a+(1-b)Y APS=S/Yd MPS=△S/△Yd=1-b APS+APC=1 MPS+MPC=1