1. The Demand for Goods Total Demand

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

3. 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

4. The Determination of Equilibrium Output Demand for Goods (Z)

5. 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

6. Y = supply Z = Demand = Y = Z @ equilibrium The Determination of Equilibrium Output Finding Equilibrium

7. The Determination of Equilibrium Output The Algebra: Y=Z

8. –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