The Short – Run Macro Model. The Short-Run Macro Model. In short-run, spending depends on income, and income depends on spending. The more income households have, the more they will spend. The more households spend, the more output firms will produce
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Since Yd = Y – T,
C = a + b(Y – T)
So,C = (a- bT) + bY
For instance, insufficient spending causes business firms to decrease their demand for labor.
ΔIP, the increase in total income (GDP) is calculated as: