Test 2 Flashcards
EV[Y^d] - Y^d
Expected demand - real Demand
Expectation Error
C = c(Y^disp{+ve}), dC/dY^disp > 0
Keynes Absolute income hypothosis
0 < dC/dY^disp < 1
How much you consume proportional to your Y(income)
Marginal propensity to consume (mpc)
if mpc 0
C= å + ßy
å= need to live
ß= mpc
Linear C function
Y-C=-å+(1-ß)Y
Savings (S)
dY/dI=1/1-ß>1
e.g.
mpc=0.9
1/0.9= 10
Investment multiplier
dY/dI=1/1-ß>1
e.g.
mpc=0.9
1/0.9= 10
Investment multiplier
If I increase by $1 then Y increase by $10
chnages in I changes the Y (Y=C+I) which then changes C, C then changes Y which then changes C etc etc until overall change of 10 is achieved
Keynes multiplyer
finding Eq
Y0=1/1-(1-t)ß [å+I+G]
- Y^s=Y^d=Y
- Y^d= C+I+G
3.C=C(Y^disp)=å+ßY^dsip, å>0, 0≤ß<1 - Y^dsip= Y-T
- T= tY, 0
IS curve system
W= M+B
Money and Bonds are mirrors
Money
No interest, risk free
Bonds
Positive Interest, risky and non-maturing
Walrus law
Eq in one market means eq in other market
three types of motives to hold money, T, P and S
T= transaction
P= precaution
S= speculation, (Ls) i decrease leads to increase in money demand
