III' UNIT III

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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
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ASSUMING NO INTERNATIONAL TRADE
FOR ALL POINTS ALONG AD CURVE
C PLANNED I G GDP
THAT IS WHAT MAKES THESE POINTS
SPECIAL AND WHAT FORMS THE AD CURVE.
For any point, anywhere, whether on AD or AS or
NOT, C Actual I G GDP Why?
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PRICE
LEVEL
AD
REAL
GDP
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PRICE
Actual Inventory gt Planned Inventory, so
LEVEL
Actual Investment gt Planned Investment, so
C Actual I G gt C Planned I G
AD
REAL
GDP
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PRICE
Actual Inventory lt Planned Inventory, so
LEVEL
Actual Investment lt Planned Investment, so
C Actual I G lt C Planned I G
AD
REAL
GDP
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PRICE
Actual Inventory Planned Inventory, so
LEVEL
Actual Investment Planned Investment, so
C Actual I G C Planned I G
AD
REAL
GDP
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A.S.1
PRICE
LEVEL
P.L.1
AGGREGATE
DEMAND
P.L.2
A.S.2
G
P.I.
A.C.
I.C.
REAL
GDP
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A.S.1
PRICE
LEVEL
P.L.1
AGGREGATE
DEMAND
P.L.2
A.S.2
G
P.I.
A.C.
I.C.
A.C.1
REAL
GDP
A.C.2
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DETERMINANTS OF
AUTONOMOUS CONSUMPTION
AUTO. C
1. NOMINAL WEALTH
AUTO. C
2. PRICE LEVEL
AUTO. C
3. CONSUMER DEBT
4. EXPECTATIONS
AUTO. C
AUTO. C
5. LUMP SUM TAXES
AUTO. C
6. MONEY SUPPLY
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A.S.1
PRICE
LEVEL
P.L.1
AGGREGATE
DEMAND
P.L.2
A.S.2
G
P.I.
A.C.
I.C.
P.I.1
REAL
P.I.2
GDP
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GENERALIZATION
GIVEN EXPECTATIONS
INTEREST RATE UP
PLANNED I DOWN
INTEREST RATE DOWN
PLANNED I UP
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BUT PRICE LEVEL
GENERALIZATION
CHANGED----NOT
GIVEN EXPECTATIONS
MONEY SUPPLY!!!!!!!???
INTEREST RATE UP
PLANNED I DOWN
INTEREST RATE DOWN
PLANNED I UP
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INTEREST RATE
GENERALIZATION
"EFFECT"
GIVEN EXPECTATIONS
OF P.LEVEL CHANGE
INTEREST RATE UP
PLANNED I DOWN
INTEREST RATE DOWN
PLANNED I UP
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MONEY SUPPLY 200
100
100
100
100
100
100
100
100
100
100
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MONEY SUPPLY 200
1000
100
100
100
100
100
100
100
100
100
100
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MONEY SUPPLY 200
100
100
100
100
100
100
100
100
100
100
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MONEY SUPPLY 200
25
100
100
100
100
100
100
100
100
100
100
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BUT WE ARE NOT TALKING
ABOUT A CHANGE IN THE
MONEY SUPPLY
WE'RE TALKING ABOUT A CHANGE
IN PRICE LEVEL!!!!!!!!!!
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WERE MONEY SUPPLY TO CHANGE
ENTIRE A.D. CURVE WOULD SHIFT
WE ARE TRYING TO EXPLAIN A.D.'S
--------
SHAPE
NOT WHY IT WOULD SHIFT
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MONEY SUPPLY 200
100
100
100
100
100
100
100
100
100
100
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MONEY SUPPY 200
25
25
25
25
25
25
25
25
25
25
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MONEY SUPPLY 200
100
100
100
100
100
100
100
100
100
100
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MONEY SUPPLY 200
200
200
200
200
200
200
200
200
200
200
25
A.S.1
PRICE
LEVEL
P.L.1
AGGREGATE
DEMAND
P.L.2
A.S.2
G
P.I.
A.C.
I.C.
P.I.1
REAL
P.I.2
GDP
26
A.S.1
PRICE
LEVEL
P.L.1
AGGREGATE
DEMAND
P.L.2
A.S.2
G
P.I.
A.C.
I.C.
REAL
G.1
G.2
GDP
27
A.S.1
PRICE
LEVEL
P.L.1
AGGREGATE
DEMAND
P.L.2
A.S.2
G
P.I.
A.C.
I.C.
REAL
I.C.1
I.C.2
GDP
28
A.S.1
PRICE
LEVEL
P.L.1
AGGREGATE
DEMAND
P.L.2
A.S.2
G
P.I.
A.C.
I.C.
REAL
I.C.1
I.C.2
GDP
GDP1
GDP2
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A.S.1
PRICE
LEVEL
P.L.1
P.L.2
A.S.2
G
P.I.
A.C.
I.C.
REAL
GDP
GDP2
GDP1
31
A.S.1
PRICE
LEVEL
P.L.1
P.L.2
A.S.2
G
P.I.
A.C.
I.C.
REAL
GDP
GDP2
GDP1
32
PRICE
LEVEL
P.L.1
P.L.2
G
P.I.
P.I.
G.
A.C.
I.C.
GDP2
GDP1
33
A.S.1
PRICE
LEVEL
P.L.1
P.L.2
A.S.2
G
P.I.
A.C.
I.C.
REAL
GDP
GDP2
GDP1
34
A.S.1
PRICE
LEVEL
P.L.1
P.L.2
A.S.2
G
G
P.I.
A.C.
I.C.
REAL
GDP2
GDP
GDP1
35
A.S.1
PRICE
LEVEL
P.L.1
P.L.2
A.S.2
G
I.C.
A.C.
I.C.
REAL
GDP2
GDP1
GDP