A summary of the work done in chapter 13 of EKN 120. This covers the basic macroeconomic knowledge and principles. Such as GDP, the multipliers, and the different approaches to calculating GDP
Assumptions and simplifications
A ‘Stuck Price’ model: Prices are fixed. The price level cannot change at all
Unplanned inventory adjustments: Sometimes inventories fall or rise by more than the
intended quantity because demand is either unexpectedly high or low
Current relevance: The Keynesian AE model remains relevant today because many prices are
inflexible downwards over short periods of time
Income vs. Consumption/Savings
Income-Consumption
Consumption: Spending by households on goods and services, with the exception of new
housing purchases
Positive relationship between income and consumption
The more the consumers earn (after tax), the more they spend
Consumption schedule: A schedule showing the amounts households plan to spend on
consumer goods at different levels of disposable income
Income-Savings
Savings: Part of the income that is not consumed
Positive relationship between Income and savings
The more households earn, the more they can save
Saving schedule: A schedule that shows the amounts households plan to save at different
levels of disposable income
Other things being equal , there is a direct relationship between income and consumption
and income and saving
Disposable Income
Denoted by Yd
A key determinant of consumption
Yd = Total Income – Taxes
o Y-t
Disposable income is divided between consumption and savings
o Yd= C+S
Marginal Propensities
Marginal propensity to Consume (MPC)
The portion of change in income that is consumed
MPC = Change in Consumption/Change in Income
MPC is the numerical value of the slope of the consumption function
, Marginal Propensity to Save (MPS)
The portion of change in income that is saved
MPS = Change in Savings/Change in income
MPS is the numerical value of the slope of the savings function
MPS + MPC =1
Variable 1: C and S are determined by Yd
o C= Yd
o S= Yd-C
Variable 2: C and S is determined by MPC and MPS respectively
o C = cYd
o S = (1-c) Yd
Variable 3: C and S will finally be influenced by the exogenous consumption Co
o C = Co + cYd
o S = -Co + (1-c)Yd
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Jaydenk21. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $2.81. You're not tied to anything after your purchase.
