ch08 Aggregate Expenditure and Equilibrium Output.pptVIP

Prepared by: Fernando Quijano Shelly Tefft;;The level of GDP, the overall price level, and the level of employment—three chief concerns of macroeconomists—are influenced by events in three broadly defined “markets”: Goods-and-services market Financial (money) market Labor market;? FIGURE III.1 The Core of Macroeconomic Theory;;aggregate output The total quantity of goods and services produced (or supplied) in an economy in a given period. ;consumption function The relationship between consumption and income.;With a straight line consumption curve, we can use the following equation to describe the curve:;marginal propensity to consume (MPC) That fraction of a change in income that is consumed, or spent.;identity Something that is always true.;? FIGURE 8.3 The Aggregate Consumption Function Derived from the Equation C = 100 + .75Y ;? FIGURE 8.4 Deriving the Saving Function from the Consumption Function in Figure 8.3 ;The assumption that consumption depends only on income is obviously a simplification. In practice, the decisions of households on how much to consume in a given period are also affected by their wealth, by the interest rate, and by their expectations of the future. Households with higher wealth are likely to spend more, other things being equal, than households with less wealth. ;Economists have generally assumed that people make their saving decisions rationally, just as they make other decisions about choices in consumption and the labor market. Saving decisions involve thinking about trade-offs between present and future consumption. Recent work in behavioral economics has highlighted the role of psychological biases in saving behavior and has demonstrated that seemingly small changes in the way saving programs are designed can result in big behavioral changes. ;? FIGURE 8.5 The Planned Investment Function;equilibrium Occurs when there is no tendency for change. In the macroeconomic goods market, equilibrium occurs when planned