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The Demand for Goods Total Demand
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The Demand for Goods C = C 0 + C 1 Y D Consumption (C)
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The Demand for Goods Investment is an exogenous variable Exogenous/autonomous/independent variables are not explained in our model Endogenous/dependent variables depend on other variables in our model C is endogenous because it responds to production: C = c 0 + c 1 (Y – T) I, G & T are exogenous –no reliable behavioral rule for G & T –G & T are determined outside the model
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The Determination of Equilibrium Output Demand for Goods (Z)
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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
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Y = supply Z = Demand = Y = Z @ equilibrium The Determination of Equilibrium Output Finding Equilibrium
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The Determination of Equilibrium Output The Algebra: Y=Z
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–The larger the propensity to consume, c 1, the larger the spending multiplier –A change in autonomous spending changes output, income and spending more than the direct change in autonomous spending The Determination of Equilibrium Output
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