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Chapter 13 Summary- EKN 120 $2.82   Add to cart

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Chapter 13 Summary- EKN 120

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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

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  • Chapter 13
  • December 6, 2022
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  • 2022/2023
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EKN 120

Chapter 13: Basic Macroeconomic relationships

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

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