Congratulations on Successful Congratulations on Successful Completion of 1Completion of 1stst Semester!! Semester!!

Reminder: you are close but not there yet Reminder: you are close but not there yet Reminder: Economics is really fun and interestingReminder: Economics is really fun and interesting Senior Reminder: Academic expectationsSenior Reminder: Academic expectations Senior Reminder: You will likely need this for college and lifeSenior Reminder: You will likely need this for college and life

Juniors Reminder:Juniors Reminder:

Natl. Score DistributionsNatl. Score Distributions

Score PercentScore Percent 5 14.9%5 14.9% 4 22.7%4 22.7% 3 15.2%3 15.2% 2 19.8%2 19.8% 1 27.5%1 27.5%

Aggregate Demand and Aggregate Demand and Aggregate Supply: Aggregate Supply:

Fluctuations in Outputs and Fluctuations in Outputs and PricesPrices

Keynesian= Simple Model of Keynesian= Simple Model of the Economythe Economy

Purpose of 3.1 is to develop a simple Purpose of 3.1 is to develop a simple model of the economymodel of the economy

GDP= C+I+G+NXGDP= C+I+G+NX Variable?Variable? Keynesian Model= Price level held Keynesian Model= Price level held

constantconstant

Simple Keynesian ModelSimple Keynesian Model

Planned aggregate expenditure = C + I + G + NX 45 degree line: all points where production (real

GDP) = aggregate expenditure Equilibrium occurs where planned aggregate

expenditure equals production

Equilibrium and Disequilibrium in Equilibrium and Disequilibrium in thethe

Keynesian ModelKeynesian Model

C(consumption) = a+b(marginal propensity to consume)*Y(income or C(consumption) = a+b(marginal propensity to consume)*Y(income or output)output)

MPC= change in consumption/change in incomeMPC= change in consumption/change in income

What can households do with What can households do with income?income?

MPC (marginal propensity to MPC (marginal propensity to consume) + MPS (marginal consume) + MPS (marginal propensity to save) = 1propensity to save) = 1

APC (average propensity to APC (average propensity to consume)consume)

APS (average propensity to save)APS (average propensity to save)

Saving and DissavingSaving and Dissaving

Increase in InvestmentIncrease in Investment

Investment DemandInvestment Demand

Interest rate decreases from r to r1. Investment increases from I to I1.

Different Elasticities of Investment Different Elasticities of Investment DemandDemand

Decrease of interest rates from r to r1. * With IA, investment increases from I to I2.

With IB, investment increases from I to I1. * IA is more elastic than IB.