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CH 19
CH 19
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Core of Macroeconomic Theory
Chapters 19-20
The Market for
Goods and Services Chapter 23 Chapter 24 Chapter 25
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Aggregate Output and
Aggregate Income (Y)
Aggregate output (income) (Y) is a
combined term used to remind you of the
exact equality between aggregate output
and aggregate income.
When we talk about output (Y), we mean
real output, not nominal output. Output
refers to the quantities of goods and
services produced, not the dollars in
circulation.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income, Consumption,
and Saving (Y, C, and S)
A household can do two, and only two,
things with its income: It can buy goods
and servicesthat is, it can consumeor
it can save.
Saving is the part of its income that a
household does not consume in a given
period. Distinguished from savings, which
is the current stock of accumulated saving.
S Y C
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Saving Aggregate Income Consumption
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Explaining Spending Behavior
2. Household wealth
3. Interest rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
An Aggregate Consumption Function
C 1 0 0 .7 5 Y
At a national income of
zero, consumption is
$100 billion (a).
For every $100 billion
increase in income
(Y), consumption
rises by $75 billion
(C).
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
An Aggregate Consumption Function
Derived from the Equation C = 100 + .75Y
C 1 0 0 .7 5 Y
AGGREGATE AGGREGATE
INCOME, Y CONSUMPTION, C
(BILLIONS OF DOLLARS) (BILLIONS OF DOLLARS)
0 100
80 160
100 175
200 250
400 400
400 550
800 700
1,000 850
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Consumption and Saving
M PC+M PS 1
Once we know how much consumption will result
from a given level of income, we know how much
saving there will be. Therefore,
S Y C
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Deriving a Saving Function
from a Consumption Function
C 1 0 0 .7 5 Y
S Y C
AGGREGATE AGGREGATE AGGREGATE
INCOME, Y CONSUMPTION, C SAVING, S
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Planned Investment (I)
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Planned Investment (I)
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Planned Investment (I)
To determine
planned aggregate
expenditure (AE), we
add consumption
spending (C) to
planned investment
spending (I) at every
level of income.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Equilibrium Aggregate Output (Income)
In macroeconomics,
equilibrium in the goods
market is the point at which
planned aggregate
expenditure is equal to
aggregate output.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Equilibrium Aggregate Output (Income)
aggregate output Y
planned aggregate expenditure AE C + I
equilibrium: Y = AE, or Y = C + I
Disequilibria:
Y>C+I
aggregate output > planned aggregate expenditure
Inventory investment is greater than planned.
Actual investment is greater than planned investment.
C+I>Y
planned aggregate expenditure > aggregate output
Inventory investment is smaller than planned.
There is unplanned inventory disinvestment.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Inventory Adjustment
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Deriving the Planned Aggregate
Expenditure Schedule.
C 1 0 0 .7 5 Y I 25
Deriving the Planned Aggregate Expenditure Schedule and Finding Equilibrium (All Figures in
Billions of Dollars) The Figures in Column 2 are Based on the Equation C = 100 + .75Y.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Multiplier
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Multiplier
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Multiplier
After an increase in
planned investment,
equilibrium output is
four times the
amount of the
increase in planned
investment.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Multiplier
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Paradox of Thrift
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair