Term 1 Lecture 2: The Goods Market Flashcards

1
Q

Why is production = demand = income for a goods market in equilibrium (3)

A

-Changes in demand for goods = changes in production
-Changes in production = changes in income
-Changes in income = changes in demand for goods

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2
Q

What is the consumption function and Keynesian consumption function (2)

A

-C=C(Y_D) is the consumption function, showing how consumption is a positive function of disposable income
-C=C_0 +C_1Y_D is the Keynesian consumption function, C0 being what people would consume if disposable income was 0 and C1 being the marginal propensity to consume

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3
Q

What are the differences between endogenous and exogenous variables (2)

A

-Endogenous variables depend on other variables
-Exogenous variables are not explained but taken as given

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4
Q

How to rearrange the AD formula to make income the subject

A

-Z = C + I + G
-Y = C_0 + C_1Y-C_1T + I + G (Production = demand = income, put in Keynesian consumption function)
-Y = (1/1-C_1)(C_0+I+G-C_1T)
-Autonomous spending is the (C_0+I+G-C_1T), as this doesn’t depend on output

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5
Q

How to draw a production function (4)

A

-Label income on the X axis, and Demand/Production on the y axis (demand = production)
-Draw a 45 degree line, where production = demand = income
-Draw your straight diagonally upwards sloping consumption function, with slope c_1 and y intercept c_0
-Where the 2 lines intercept is equilibrium output

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6
Q

How to get the IS relation (3,1)

A

-Y = C + I + G
-Y - T - C = I+G-T
-S=I+(G-T)

-This is Keynes’ alternate model, based on investment = saving

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