Summary of unit 14 Core Economy.
Topics covered:
Role of Government
Aggregate demand function
Multiplier model
Household wealth
Investment spending
Stabilising the economy
• GOP fluctuates due to consumption & investment decisions
• government intervention can stabilise an economy
• Great moderation- Period of low volatility in aggregate output in advanced economies between
the 1980s and the 2008 financial crisis
• Exogenous factors: government spending, exports
• Consumption: household’s MPC is out of disposable income (1-t)Y
• Investment: depends on the interest rate and after-tax rate of profit
• Imports: The amount of imports depends on domestic income.
• Marginal propensity to import = The fraction of each additional unit of income that is spent on
imports
• Primary budget deficit = G –T
• pro-cyclical
• the government must borrow to cover the gap between spending and revenue, by issuing bonds
Government debt = sum of all the bonds sold over time to finance budget deficit – matured bonds
(repaid debt).
Sovereign debt crisis = a situation in which government bonds come to be considered risky
(default risk).
Debt-to-GDP ratio = The level of indebtedness of a government is measured relative to the size of
the economy
Indebtedness can fall
• if the primary budget balance is positive
• if GDP is growing faster than government debt
• if in ation is high (real value of debt falls)
AGGREGATE DEMAND FUNCTION
- aggregate consumption function (total consumption spending)
- Aggregate demand: The total of the components of spending in the economy, added to
get GDP: Y = C + I + G + X – M. It is the total amount of demand for (or expenditure
on) goods and services produced in the economy.
- Assumption: firms are willing to supply any amount of the goods demanded by those
making purchases in the economy; they are not operating at full capacity utilisation.
- Capacity utilisation rate - A measure of the extent to which a firm, industry, or entire
economy is producing as much as the stock of its capital goods and current knowledge
would allow.
fl
, -There
are only two components to aggregate spending:
• Consumption : C = Co + C1Y
• Investment : Does not depend on income therefore Co
1. Autonomous Consumption (Co)
- the fixed amount spent, independent of Income
- even if income = 0 (still consumption)
• savings, credit facilities borrowing
2 . Consumption dependent on income (C1)
- proportional to current income
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 EFT, 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 this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller miaphillips. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R99,00. You're not tied to anything after your purchase.
