Unit 14 Unemployment and fiscal policy
The great moderation was a period with little change in aggregate output.
14.1 Unemployment and fiscal policy
The aggregate demand (AD) is the sum of all the spending’s in an economy.
The government can to affect the AD, using the multiplier process, how much a change in
spending’s can affect AD.
14.2 The multiplier model
Aggregate consumption function:
AD = Fixed amount (autonomous consumption) + Variable amount (depends on income).
C = c0 + c1Y.
The marginal propensity to consume (MPC) is c1, the
change in consumption when income changes by one
unit. (rich) 0 < c1 < 1 (poor).
Goods market equilibrium, point where output equals
the AD (C + I) v (c0 + c1Y + I).
Therefore, investment is similar to autonomous
consumption.
Autonomous demand is the aggregate demand independent of current income.
14.3 Household target wealth, collateral, and consumption spending
People can save in advance in order to cover future costs, this is called precautionary
savings. When your house value drops, you can start saving to bring it back to market value.
People might want to save in advance in order to maintain their own chosen target wealth.
The fall of autonomous consumption in the US:
Uncertainty caused people to postpone investments and purchases.
Pessimism and the desire to save more people thought they couldn’t maintain
current spending’s.
The banking crisis affected consumption and investment, households lost deposits
and small firms lost their credits.
Human capital are the skills, stocks and knowledge of a person, improving the human capital
through education leads too economic growth. If a person has more wealth, he can borrow
more, giving him the option to get even wealthier, this is called a financial accelerator.
Equity is the individual’s own investment in a project.
Home equity + financial wealth = Net worth
Home equity = value of house – debt
The great moderation was a period with little change in aggregate output.
14.1 Unemployment and fiscal policy
The aggregate demand (AD) is the sum of all the spending’s in an economy.
The government can to affect the AD, using the multiplier process, how much a change in
spending’s can affect AD.
14.2 The multiplier model
Aggregate consumption function:
AD = Fixed amount (autonomous consumption) + Variable amount (depends on income).
C = c0 + c1Y.
The marginal propensity to consume (MPC) is c1, the
change in consumption when income changes by one
unit. (rich) 0 < c1 < 1 (poor).
Goods market equilibrium, point where output equals
the AD (C + I) v (c0 + c1Y + I).
Therefore, investment is similar to autonomous
consumption.
Autonomous demand is the aggregate demand independent of current income.
14.3 Household target wealth, collateral, and consumption spending
People can save in advance in order to cover future costs, this is called precautionary
savings. When your house value drops, you can start saving to bring it back to market value.
People might want to save in advance in order to maintain their own chosen target wealth.
The fall of autonomous consumption in the US:
Uncertainty caused people to postpone investments and purchases.
Pessimism and the desire to save more people thought they couldn’t maintain
current spending’s.
The banking crisis affected consumption and investment, households lost deposits
and small firms lost their credits.
Human capital are the skills, stocks and knowledge of a person, improving the human capital
through education leads too economic growth. If a person has more wealth, he can borrow
more, giving him the option to get even wealthier, this is called a financial accelerator.
Equity is the individual’s own investment in a project.
Home equity + financial wealth = Net worth
Home equity = value of house – debt
