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Warm-Up

Warm-Up. Why did boom towns rise in the Old West? What happened to them over time? What is the formula for GDP?. Income and Expenditure. Chapter 27: Income and Expenditure (pages 704-727). What is GDP?. GDP = C + G + I + (X-M). Consumer Consumption. Consumers have disposable income (Y d )

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Warm-Up

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  1. Warm-Up • Why did boom towns rise in the Old West? • What happened to them over time? • What is the formula for GDP?

  2. Income and Expenditure Chapter 27: Income and Expenditure (pages 704-727)

  3. What is GDP? • GDP = C + G + I + (X-M)

  4. Consumer Consumption • Consumers have disposable income (Yd) • Can either spend or save it • MARGINAL PROPENSITY TO CONSUME • MARGINAL PROPENSITY TO SAVE MPC + MPS = 1

  5. Consumption Schedule

  6. The Multiplier… One person’s spending becomes another person’s income…

  7. The Multiplier… • Consumption grows when MPC > 0 • Multiplier =

  8. Consumption Grows… $1,000 led to $2,361.60 in additional spending (and more if we kept going)!!

  9. Work Together to Answer These… • Would the multiplier be larger or smaller if you saved more of your additional income? • What is the multiplier if MPC = 0.67? • How much will GDP change if consumer spending increases by $100 billion (assume MPC = 0.6)?

  10. Multiplier in Real Life…

  11. Causes of Change in Consumption • Change in future disposable income • Spending  w/ expected  in Yd • Opposite if you expect to earn less • Change in aggregate wealth •  in wealth =  in consumption

  12. Investment Spending & GDP

  13. Investment Spending • Impacted by: • Interest rate • Expected real GDP • Current production capacity

  14. Expected Interest Rates • Decision to spend balances additional sales with cost of borrowing • EXAMPLE: To build a factory or not… • Expected return = 5% • Interest rate = 7% • What if interest = 3% Build or not?

  15. Expected Change in GDP •  in real GDP =  in output • Investment spending helps meet expected output • Faster GDP  =  investment spending

  16. Production Capacity • Production capacity = possible output • Excess capacity = output < maximum • Excess capacity =  investment spending • EXAMPLE: 100,000 unit capacity • If demand = 50,000 then … • What if demand was 125,000 …

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