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- 1. Product Markets and National Output Chapter 12
- 2. Discussion Topics <ul><li>Circular flow of payments </li></ul><ul><li>Composition and measurement of gross domestic product </li></ul><ul><li>Consumption, saving and investment </li></ul><ul><li>Equilibrium national income and output </li></ul>
- 3. Circular Flow Diagram for General Economy
- 4. Page 224 We can measure macro economic activity in either resource markets or product markets. Result is the same…
- 5. Page 224 Four major sectors In this economy…
- 6. Page 224 Businesses are net borrowers in financial markets while households are net savers…
- 7. Page 224 Government receives net inflows of taxes from businesses and households and is a net borrower in financial markets…
- 8. Page 224 Businesses make investment expenditures, Governments makes expenditures, and Households make consumption expenditures
- 9. Page 224 Businesses receive funds from total expenditures in product markets while households, who own businesses, receive wages, rents, interest and business in resource markets profits where they provide labor and capital services…
- 10. Measurement of Gross Domestic Product
- 11. Page 227 Everything below zero represents a recession
- 12. GDP = C + I + G + (X – M) Page 225
- 13. GDP = C + I + G + (X – M) Page 225
- 14. GDP = C + I + G + (X – M) Page 225
- 15. GDP = C + I + G + (X – M) Page 225
- 16. What’s in GDP?
- 17. Page 226 Types of consumer expenditures…
- 18. Page 226 Types of investment expenditures…
- 19. Page 226 Calculation of net exports…
- 20. Page 226 Types of government Expenditures…
- 21. Page 226 Items not included in GDP…
- 22. Understanding the Domestic Determinants of GDP C, I and G
- 23. Page 228 Autonomous or fixed consumption Planned Consumption Function The slope of the consumption function is the marginal propensity to consume (MPC), or C ÷ Y D where Y D represents disposable income.
- 24. Page 228 Planned Consumption Function The consumption function in this graph can be expressed graphically as shown below. C = A C + MPC(DPI)
- 25. Page 228 Consumer expenditures would be $3,600 if disposable income was equal to $3,000. Consumers would be dis-saving by $600. Planned Consumption Function C = $1,500 + .70($3,000) = $3,600
- 26. Page 228 An increase in dis- posable income to $4,000 would raise expenditures to $4,300. Dis-saving would fall to $300. Planned Consumption Function C = $1,500 + .70($4,000) = $4,300
- 27. Page 228 An increase in disposable income to $5,000 would raise expenditures to $5,000. Dis-saving would fall to zero. Planned Consumption Function C = $1,500 + .70($5,000) = $5,000
- 28. Savings vs. Consumption We said that the slope of the consumption function was the marginal propensity to consume , or: MPC = C ÷ DPI Savings is defined as S = DPI – C And, therefore, the marginal propensity to save is MPS = 1.0 – MPC Page 228 and 230
- 29. When the savings rate rises significantly, a recession is often near.
- 30. Page 228 A role for fiscal policy here: A cut in the tax rate increases consump- tion. An increase in the tax rate decreases consumption. Planned Consumption Function
- 31. Page 228 A role for fiscal policy here: A cut in the tax rate increases consump- tion. An increase in the tax rate decreases consumption. Planned Consumption Function
- 32. Page 230 Real Wealth Effect Suppose stock market prices rose, increasing real wealth of consumers by $700.
- 33. Page 230 Real Wealth Effect This would increase the intercept by $700,
- 34. Page 230 Real Wealth Effect C = $2,200 + .70($4,000) = $5,000 This shifts the curve upward for given income level, boosts consumer spending to $5,000. This raises dis-saving to $1,000, raises debt relative to income, and can be inflationary…..
- 35. Page 233 Planned Investment Function Level of autonomous investment spending I = A I – MEI(i)
- 36. Page 233 Planned Investment Function The slope of the investment function is the marginal efficiency of investment, or: MEI = I ÷ i I = A I – MEI(i)
- 37. Page 233 Planned Investment Function Level of investment expenditures would be $250 at an interest rate of 9 percent if MEI = 25. I = $475 – 25(9.0)
- 38. Page 233 Planned Investment Function Should interest rates fall to 7% as a result of events in the money market, investment expenditures would increase from $250 to $300. I = $475 – 25(7.0)
- 39. Page 233 Effects of Profit Expectations I = $525 – 25(7.0) An increase in profit expectations would cause businesses to expand their planned investment expenditures by $50 at the same interest rate
- 40. Understanding Product Market Equilibrium
- 41. Aggregate Expenditures Consumption expenditures function: C = $1,500+0.70(DPI) Page 235
- 42. Aggregate Expenditures Consumption expenditures function: C = $1,500+0.70(DPI) Investment expenditures function: I = $475 –25(i) Page 235
- 43. Aggregate Expenditures Consumption expenditures function: C = $1,500+0.70(DPI) Investment expenditures function: I = $475 –25(i) Government expenditures function: G = $880 Page 235
- 44. Aggregate Expenditures Consumption expenditures function: C = $1,500+0.70(DPI) Investment expenditures function: I = $475 –25(i) Government expenditures function: G = $880 If the interest rate (i) is equal to 7%, then AE = $1,500 + 0.70(DPI) + $475 – 25(7) +$880 = $2,680 + 0.70(DPI) Page 235
- 45. Aggregate Expenditures Aggregate expenditures equation: AE = $2,680+0.70(NI-Tax) Page 235
- 46. Aggregate Expenditures Aggregate expenditures equation: AE = $2,680+0.70(NI-Tax) where national output equals national income (NI) and Tax is based upon last year’s income (Tax = $400). Page 235
- 47. Aggregate Expenditures Aggregate expenditures equation: AE = $2,680+0.70(NI-Tax) where national output equals national income (NI) and Tax is based upon last year’s income (Tax = $400). If national income is $6,000, then AE = $2,680+0.70($6,000 - $400) = $6,600 which represents the first line in Table 12.4 Page 235
- 48. Aggregate Expenditures Aggregate expenditures equation: AE = $2,680+0.70(NI-Tax) where national output equals national income (NI) and Tax is based upon last year’s income (Tax = $400). If national income is $6,000, then AE = $2,680+0.70($6,000 - $400) = $6,600 which represents the first line in Table 12.4 Repeating this for other levels of income gives us the graph on page 235 Page 236
- 49. Page 236 Total autonomous domestic spending… Aggregate Expenditures Curve
- 50. Page 236 Point where spending equals output… Aggregate Expenditures Curve
- 51. Page 237 Deriving Aggregate Demand Curve Demand equals supply Corresponding price level Aggregate demand curve
- 52. Page 238 Aggregate Supply Curve Three distinct ranges of aggregate supply curve
- 53. Page 238 Aggregate Supply Curve Maximum potential output in the short run… End of depression or Keynesian range
- 54. Page 238 Y FE represents full employment output Y E represents current or actual output Y POT represents potential or maximum output Product Market Equilibrium
- 55. Page 238 Product Market Equilibrium Planned spending exceeds full employment output, causing higher inflationary pressures in economy. Planned spending less than full employment output, causing underutilization of economy’s resources. Y E > Y FE Y FE > Y E
- 56. Summary <ul><li>GDP consists of C, I, G and (X-M) </li></ul><ul><li>Focus is on new goods produced and services performed in the current year </li></ul><ul><li>Consumption influenced by disposable income and wealth </li></ul><ul><li>Investment influenced by interest rates and profit expectations </li></ul><ul><li>Product market equilibrium occurs where aggregate demand equals aggregate supply </li></ul><ul><li>Inflationary and recessionary gaps occur when economy not at full employment output </li></ul>
- 57. Chapter 13 focuses on the application of monetary and fiscal policy ….

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