Lectue 2 - 3-3 Flashcards
What is the equilibrium condition in the goods market and how is it derived?
The equilibrium condition in the goods market is represented by the equation Y = Z, where Y is production and Z is the demand for goods. This condition implies that production must be equal to the demand for goods. It’s derived by first defining the demand for goods (Z) as the sum of consumption (C), investment (I), and government spending (G). By substituting the expressions for C and I into Z, and then equating it to production (Y), we obtain the equilibrium condition.
What types of equations are used in models, as seen in this example?
Models use three types of equations: identities, behavioral equations, and equilibrium conditions. An identity is a definition, like the equation defining disposable income. A behavioral equation describes the behavior of economic agents, like the consumption function. An equilibrium condition, such as production equals demand, is used to determine the balance in a model.
How is equilibrium output determined in the goods market?
Equilibrium output in the goods market is determined by the equation Y = (c0 + I + G - c1T) / (1 - c1). This equation arises from rearranging the equilibrium condition to isolate Y. It shows that equilibrium output is a function of autonomous spending (c0 + I + G - c1T) and the multiplier (1 / (1 - c1)). Autonomous spending includes elements independent of output, while the multiplier amplifies the effect of changes in autonomous spending on output.
What is the multiplier effect and how does it work?
The multiplier effect is a concept in macroeconomics where a change in economic activity (like government spending or investment) leads to a greater than proportional change in total economic output. It occurs because an initial increase in spending leads to increased production, which then increases income and further boosts spending, creating a cycle of increasing economic activity. The multiplier is calculated as 1 / (1 - c1), where c1 is the marginal propensity to consume.
How does the economy adjust to changes in demand in the short run?
In the short run, the economy adjusts to changes in demand through a series of responses that gradually move it towards a new equilibrium. Initially, an increase in demand (like a rise in consumption or government spending) leads to higher production, which then increases income and further boosts demand. This process continues until the new equilibrium is reached. The speed of adjustment depends on factors like how quickly firms revise production schedules in response to changes in demand. The adjustment is not instantaneous and can take time, reflecting real-world dynamics.
