Goods market Flashcards
What is the composition of AD?
Z= C+I+G+(X-M)
What is the consumption function?
C=c^o+c^1Yd
I and G are …. variables
Exogenous
What is Yd?
Disposable income (income after tax)
What is c^1?
The marginal propensity to consume
What is c^0?
The autonomous consumption
Explain MPC
The effect of an additional increase in income on consumption.
What does equilibrium in the goods market require?
Production (Y) is equal to demand for goods (Z)
What is income (Y) in terms of autonomous spending and the multiplier?
Y=1/(1-c^1)(c^o+I+G-c^1T)
What is autonomous spending?
(c^o+I+G+c^1T)
What does autonomous spending imply?
The demand for goods that does not depend on output
What is the multiplier in algebraic form?
1/(1-c^1)
What is the multiplier?
It is the sum of successive increases in production resulting from an increase in demand
What is the effect of an increase in autonomous spending?
There is an increase in production equal to that of autonomous spending times the multiplier
What happens with an increase in demand?
Leads to an increase in production and a corresponding increase in income (demand determines production)
What does the size of the multiplier depend on?
The MPC
How long does it take for output to adjust?
Instantaneously
Is the model in the long run or short run?
Short run
What is happening in equilibrium?
Output equals autonomous spending times the multiplier
What is the other assumption for equilibrium in the short run?
Investment equals savings
If government spending is increased but taxes are fixed, what happens to the budget?
It goes into deficit
If taxes and government spending increase at the same time, it is called a …
Balanced budget
What is the change in Y from a balanced budget fiscal policy?
(1/(1-c^1))change in G - (c^1/(1-c^1))change in T
What an automatic stabiliser?
The economy responds less to changes in autonomous spending (than in the case where taxes are independent of income). So output tends to vary less.
