* Determinants of Z -- Government Spending The choice of tax and government spending -- fiscal policy G and T will be taken as exogenous variables for the 2 arguments - governments do not behave with the same regularity as consumers or firms - one of the tasks of macroeconomists is to think about the implications of alternative spending and tax decisions **The Determination of Equilibrium Output Assuming that firms do not hold inventories. Equilibrium in the goods market requires that production Y be equal to the demand for goods Z: Y=Z And demand in turn depends on income, Y, which is itself equal to production
interactions between production, income and demand - changes in the demand for goods -- changes in production - changes in production -- changes in income - changes in income -- changes in the demand for goods ** compostition of GDP GDP (Y) = Consumption (C) + Investment (I) + Government spending (G) + Net export (X - IM) + inventory investment 1. Consumption goods and services purchased by consumers, rangin from food to airline tickes, to vacations, to new cars, and so on. It is the largest component of GDP 2. Investment the sume of nonresidential investment and residential investment 3. Government spending the purchase of goods and services by governments But G doesn't include government transfers nor interest payment on the government debt. 4. Net exports trade deficit vs. trade surplus 5. Inventory investment the difference between goods produced and goods sold in a given year == Production = Sales + Inventory positive inventory investment: production exceeds sales ** Demand for Goods total demand for goods (Z) = C+I+G+X-IM Noted that inventory investment is not part of demand * Determinants of Z -- Consumption Assumptions: X = IM = 0 Consumption decisions depend on disposable income (Yd) -- the income that remains after consumers have received transfers from the government and paid their taxes Yd is positively related to C - consumption function: C(Yd) = c0 + c1*Yd - parameters: c1 - propensity to consume/ marginal propensity to consume; c0 - dissave Both c1 and c0 are positive
标签: Economics
