The Demand for Goods Total Demand

The Demand for Goods –C = C 0 + C 1 Y D –C 1 = propensity to consume Change in C from a dollar change in income –0 < C 1 < 1 Consumption (C)

The Demand for Goods –C = C 0 + C 1 Y D – Consumption (C)

The Demand for Goods Investment is an exogenous variable Exogenous variables –Variables that are assumed to be given and are not explained within the model Investment (I)

5 The Demand for Goods Endogenous Variables –Variables that depend on other variables in the model –C is endogenous because it responds to production (Y) C = C 0 – C 1 (Y – T)

The Demand for Goods G & T are exogenous –no reliable behavioral role for G & T –G & T are determined outside the model Government Spending (G)

The Determination of Equilibrium Output – – – – – – Demand for Goods (Z)

–Identity Equations –Behavioral Equations –Equilibrium Equations The Determination of Equilibrium Output The Model and Equation Types

1) Algebra to confirm the logic 2) Graphs to build the intuition (but we’ll skip the 45° - line diagram) 3) Words to explain the results The Determination of Equilibrium Output Three Steps to Solving a Model

–Y = supply –Z = Demand = –Y = equilibrium – The Determination of Equilibrium Output Finding Equilibrium

Dividing both sides by (1 - C 1 ) gives The Determination of Equilibrium Output The Algebra

The Determination of Equilibrium Output The Algebra: Y=Z

–The larger the propensity to consume, C 1, the larger the multiplier –A change in autonomous spending will change output more than the direct change in autonomous spending The Determination of Equilibrium Output Answers