Term 1 Lecture 2: The Goods Market Flashcards
Why is production = demand = income for a goods market in equilibrium (3)
-Changes in demand for goods = changes in production
-Changes in production = changes in income
-Changes in income = changes in demand for goods
What is the consumption function and Keynesian consumption function (2)
-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
What are the differences between endogenous and exogenous variables (2)
-Endogenous variables depend on other variables
-Exogenous variables are not explained but taken as given
How to rearrange the AD formula to make income the subject
-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
How to draw a production function (4)
-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
How to get the IS relation (3,1)
-Y = C + I + G
-Y - T - C = I+G-T
-S=I+(G-T)
-This is Keynes’ alternate model, based on investment = saving