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III. UNIT III

III. UNIT III. B. The Consumption Function. 1. Autonomous consumption. identification and determining. factors. 2. Induced consumption. identification and determining. factors. 3. Calculation of MPC and MPS. C. Determinants of Planned Investment. D. Composition of Aggregate Demand.

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III. UNIT III

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  1. III. UNIT III B. The Consumption Function 1. Autonomous consumption... identification and determining factors 2. Induced consumption... identification and determining factors 3. Calculation of MPC and MPS C. Determinants of Planned Investment D. Composition of Aggregate Demand E. Identification of recessionary and Inflationary Gaps

  2. C GDP 900 0 1650 1000 2400 2000 3150 3000 3900 4000 4650 5000 5400 6000 6150 7000 6900 8000 7650 9000 8400 10000 9150 11000 9900 12000 10650 13000 14000 11400

  3. REAL REAL C GDP 900 0 1650 1000 2400 2000 3150 3000 3900 4000 4650 5000 5400 6000 6150 7000 6900 8000 7650 9000 8400 10000 9150 11000 9900 12000 10650 13000 14000 11400

  4. INCOME REAL C GDP equals 900 0 1650 1000 2400 2000 3150 3000 3900 4000 4650 5000 5400 6000 6150 7000 6900 8000 7650 9000 8400 10000 9150 11000 9900 12000 10650 13000 14000 11400

  5. INCOME C REAL GDP equals 900 0 1650 1000 2400 2000 3150 3000 3900 4000 4650 5000 AUTONOMOUS CONSUMPTION----------- 5400 6000 6150 7000 6900 THAT PORTION OF CONSUMPTION 8000 7650 9000 EXPENDITURES WHICH IS 8400 10000 INDEPENDENT OF THE LEVEL 9150 11000 9900 OF INCOME. 12000 10650 13000 14000 11400

  6. INCOME C REAL GDP equals 900 0 1650 1000 2400 2000 3150 3000 3900 4000 4650 5000 AUTONOMOUS CONSUMPTION----------- 5400 6000 6150 7000 6900 THAT PORTION OF CONSUMPTION 8000 7650 9000 EXPENDITURES WHICH IS 8400 10000 INDEPENDENT OF THE LEVEL 9150 11000 9900 OF INCOME. 12000 10650 13000 CONSUMPTION WE'D DO IF WE HAD NO INCOME. 14000 11400

  7. INCOME C REAL GDP equals 900 0 1650 1000 2400 2000 3150 3000 3900 4000 4650 5000 AUTONOMOUS CONSUMPTION----------- 5400 6000 6150 7000 6900 THAT PORTION OF CONSUMPTION 8000 7650 9000 EXPENDITURES WHICH IS 8400 10000 INDEPENDENT OF THE LEVEL 9150 11000 9900 OF INCOME. 12000 IN THE EXTREME, CONSUMPTION WE'D DO IF 10650 13000 WE HAD NO INCOME. 14000 11400

  8. INCOME C REAL GDP equals 900 0 1650 1000 2400 2000 3150 3000 3900 4000 I 4650 5000 AUTONOMOUS CONSUMPTION----------- 5400 6000 6150 7000 6900 THAT PORTION OF CONSUMPTION 8000 7650 9000 EXPENDITURES WHICH IS 8400 INDEPENDENT OF THE LEVEL 10000 9150 11000 9900 OF INCOME. 12000 MORE REASONABLY, CONSUMPTION WE'D DO 10650 13000 BECAUSE OF OUR SAVING, RATHER THAN OUR INCOME 14000 11400

  9. DETERMINANTS OF AUTONOMOUS CONSUMPTION 1. NOMINAL WEALTH 2. PRICE LEVEL 3. CONSUMER DEBT 4. EXPECTATIONS 5. LUMP SUM TAXES 6. MONEY SUPPLY

  10. DETERMINANTS OF AUTONOMOUS CONSUMPTION 1. NOMINAL WEALTH AUTO. C AUTO. C 2. PRICE LEVEL AUTO. C 3. CONSUMER DEBT AUTO. C 4. EXPECTATIONS AUTO. C 5. LUMP SUM TAXES AUTO. C 6. MONEY SUPPLY

  11. DETERMINANTS OF AUTONOMOUS CONSUMPTION 1. NOMINAL WEALTH AUTO. C AUTO. C 2. PRICE LEVEL AUTO. C 3. CONSUMER DEBT AUTO. C 4. EXPECTATIONS AUTO. C 5. LUMP SUM TAXES AUTO. C 6. MONEY SUPPLY

  12. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) 8400 10000 9150 11000 9900 12000 10650 13000 14000 11400

  13. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $1000 13000 14000 11400

  14. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 4650 5000 IS $100 PER BOX. 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 AUTO C. CAN 10650 $1000 13000 BE 9 BOXES 14000 11400 (OR $900)

  15. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $500 13000 14000 11400

  16. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 AUTO C. CAN BE 12000 10650 $500 13000 AT MOST 5 BOXES 14000 11400 ($500)

  17. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $15 MIL. 13000 14000 11400

  18. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 AUTO. C WOULD 9900 12000 10650 $15 MIL. 13000 PROBABLY BE MORE THAN 14000 11400 9 BOXES ($900)

  19. DETERMINANTS OF AUTONOMOUS CONSUMPTION AUTO. C 1. NOMINAL WEALTH AUTO. C 2. PRICE LEVEL AUTO. C 3. CONSUMER DEBT AUTO. C 4. EXPECTATIONS AUTO. C 5. LUMP SUM TAXES AUTO. C 6. MONEY SUPPLY

  20. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 AUTO C. CAN 10650 $1000 13000 BE 9 BOXES 14000 11400 (OR $900)

  21. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 5000 IS $100 PER BOX. 4650 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 AUTO C. CAN 10650 $1000 13000 BE 9 BOXES 14000 11400 (OR $900)

  22. INCOME C REAL GDP equals 900 0 1650 1000 2400 2000 3150 3000 3900 4000 4650 5000 5400 6000 6150 7000 6900 8000 7650 9000 8400 10000 9150 11000 9900 12000 10650 13000 14000 11400

  23. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. $1000. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $1000 13000 14000 11400

  24. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. $1000. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 AUTO C. AT MOST 12000 10650 $1000 13000 WILL BE 1 BOX (OR $100) 14000 11400

  25. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. $1000. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 AUTO C. AT MOST 12000 10650 $1000 13000 WILL BE 1 BOX (OR $100) 14000 11400 WHY NOT $1000?

  26. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 AUTO C. CAN 10650 $1000 13000 BE 9 BOXES 14000 11400 (OR $900)

  27. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. $10. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $1000 13000 14000 11400

  28. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. $10. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 AUTO C. AT MOST 12000 10650 $1000 13000 COULD BE 100 BOXES (OR $10,000) 14000 11400

  29. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. $10. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 AUTO C. AT MOST 12000 10650 $1000 13000 COULD BE 100 BOXES (OR $10,000) 14000 11400 HOW $10000 IF ONLY 1000 IN BANK?

  30. A CONSUMPTION FUNCTION IS TIED TO ONE PARTICULAR PRICE LEVEL THERE IS A CONSUMPTION FUNCTION FOR EACH POSSIBLE PRICE LEVEL

  31. DETERMINANTS OF AUTONOMOUS CONSUMPTION AUTO. C 1. NOMINAL WEALTH AUTO. C 2. PRICE LEVEL AUTO. C 3. CONSUMER DEBT AUTO. C 4. EXPECTATIONS AUTO. C 5. LUMP SUM TAXES AUTO. C 6. MONEY SUPPLY

  32. WEALTH ACCUMULATES WHEN WE SPEND LESS THAN WE EARN. CONSUMER DEBT OCCURS WHEN WE SPEND MORE THAN WE EARN. THE MORE CONSUMER DEBT WE HAVE, THE LESS NOMINAL WEALTH REMAINS.

  33. - IMAGINE A 2 PERSON ECONOMY WITH NO PAST SAVINGS. SUPPOSE EACH PERSON EARNS $10,000 DURING THE YEAR. SUPPOSE ONE PERSON SAVES 1000 (USES ONLY 9000 FOR CONSUMPTION). SUPPOSE THE OTHER PERSON USES 11000 FOR CONSUMPTION (BY BORROWING 1000 FROM FIRST PERSON). NOTICE WE NOW HAVE CONSUMER DEBT. HOW MUCH WEALTH WILL CARRY ? OVER INTO NEXT YEAR.

  34. - IMAGINE A 2 PERSON ECONOMY WITH NO PAST SAVINGS. SUPPOSE EACH PERSON EARNS $10,000 DURING THE YEAR. $0 SUPPOSE ONE PERSON SAVES 1000 (USES ONLY 9000 FOR CONSUMPTION). SUPPOSE THE OTHER PERSON USES 11000 FOR CONSUMPTION (BY BORROWING 1000 FROM FIRST PERSON). NOTICE WE NOW HAVE CONSUMER DEBT. HOW MUCH WEALTH WILL CARRY ? OVER INTO NEXT YEAR.

  35. - IMAGINE A 2 PERSON ECONOMY WITH NO PAST SAVINGS. SUPPOSE EACH PERSON EARNS $10,000 DURING THE YEAR. SUPPOSE ONE PERSON SAVES 1000 (USES ONLY 9000 FOR CONSUMPTION). SUPPOSE THE OTHER PERSON USES FOR CONSUMPTION 10000 HAVE NO NOTICE WE NOW HAVE CONSUMER DEBT. HOW MUCH WEALTH WILL CARRY ? OVER INTO NEXT YEAR.

  36. - IMAGINE A 2 PERSON ECONOMY WITH NO PAST SAVINGS. SUPPOSE EACH PERSON EARNS $10,000 DURING THE YEAR. $1000 SUPPOSE ONE PERSON SAVES 1000 (USES ONLY 9000 FOR CONSUMPTION). SUPPOSE THE OTHER PERSON USES 10000 FOR CONSUMPTION NOTICE WE NOW HAVE CONSUMER DEBT. HAVE NO HOW MUCH WEALTH WILL CARRY ? OVER INTO NEXT YEAR.

  37. DETERMINANTS OF AUTONOMOUS CONSUMPTION AUTO. C 1. NOMINAL WEALTH AUTO. C 2. PRICE LEVEL AUTO. C 3. CONSUMER DEBT AUTO. C 4. EXPECTATIONS AUTO. C 5. LUMP SUM TAXES AUTO. C 6. MONEY SUPPLY

  38. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $1000 13000 14000 11400 HIGH EXPECTATIONS ABOUT FUTURE (OPTIMISTIC) GO THROUGH THIS FAST !!!!! HIGH AUTO C.

  39. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $1000 13000 14000 11400 LOW EXPECTATIONS ABOUT FUTURE (PESSIMISTIC) GO THROUGH THIS SLOW !!!!! LOW AUTO C.

  40. DETERMINANTS OF AUTONOMOUS CONSUMPTION AUTO. C 1. NOMINAL WEALTH AUTO. C 2. PRICE LEVEL AUTO. C 3. CONSUMER DEBT AUTO. C 4. EXPECTATIONS AUTO. C 5. LUMP SUM TAXES AUTO. C 6. MONEY SUPPLY

  41. DETERMINANTS OF AUTONOMOUS CONSUMPTION AUTO. C 1. NOMINAL WEALTH AUTO. C 2. PRICE LEVEL AUTO. C 3. CONSUMER DEBT AUTO. C 4. EXPECTATIONS AUTO. C 5. LUMP SUM TAXES AUTO. C 6. MONEY SUPPLY A TAX OF FIXED ABSOLUTE AMOUNT WHICH MUST BE PAID REGARDLESS OF LEVEL OF INCOME. A LUMP SUM TAX OF $10 WOULD MEAN YOU HAD TO PAY THE $10 TAX WHETHER YOU EARN $0 OR $1000000

  42. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $1000 13000 14000 11400 IF YOU HAVE NO INCOME, FIRST THING YOU MUST DO WITH THIS IS PAY LUMP SUM TAX.

  43. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $1000 13000 14000 11400 THE HIGHER THE TAX, THE LESS WEALTH IS LEFT FOR AUTO C.

  44. DETERMINANTS OF AUTONOMOUS CONSUMPTION AUTO. C 1. NOMINAL WEALTH AUTO. C 2. PRICE LEVEL AUTO. C 3. CONSUMER DEBT AUTO. C 4. EXPECTATIONS AUTO. C 5. LUMP SUM TAXES AUTO. C 6. MONEY SUPPLY

  45. DETERMINANTS OF AUTONOMOUS CONSUMPTION 1. NOMINAL WEALTH MONEY SUPPLY UP--------- AUTO. C INTEREST RATES DOWN. AUTO. C 2. PRICE LEVEL AUTO. C 3. CONSUMER DEBT MONEY SUPPLY DOWN----------- AUTO. C 4. EXPECTATIONS INTEREST RATES UP. AUTO. C 5. LUMP SUM TAXES AUTO. C 6. MONEY SUPPLY

  46. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $1000 13000 14000 11400 LOW INTEREST RATES GO THROUGH THIS FAST !!!! HIGH AUTO C.

  47. INCOME REAL GDP C equals 900 0 1650 1000 2400 2000 3150 3000 ASSUME BASE YEAR PRICE OF BOXES 3900 4000 IS $100 PER BOX. 4650 5000 5400 6000 ASSUME PRICE OF BOX THIS YEAR 6150 7000 IS $100. 6900 8000 7650 9000 SAFE(GENUINE) PAST SAVING 8400 10000 9150 11000 9900 12000 10650 $1000 13000 14000 11400 HIGH INTEREST RATES GO THROUGH THIS SLOW !!!!! LOW AUTO C.

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