...Saving Function KM: The Multiplier Model - Principles of Macro - RIT - Dr. Jeffrey Burnette The Keynesian Model: The Multiplier Model Assumptions • Each market is analyzed on an aggregate scale (One interest rate, One type of labor, One type of output) Differences from the Classical Model • The Keynesian model does not assume that markets clear in the short-run. In fact, it believes that prices are sticky downward. That is, prices may not decrease to bring the market to equilibrium. This is why it focuses on the short-run. • In the short-run spending depends upon income. • Whereas the classical model focused on equilibrium in the labor market determining the level of output, the Keynesian model will focus on the domestic spending of consumers. The Keynesian Model w/out Government • Households have 2 choices for spending their income, Purchase goods and services (Consumption) or Save. • Firms have 2 types of expenditures, purchase goods and services (Consumption) or purchase equipment and structures from borrowed funds (Planned Investment). • In the short-run, planned investment is taken to be independent of income. • There is a funds market where savings is made available to firms that wish to borrow. Disposable Income = Income - Taxes Since there is no government, taxes are equal to zero. Therefore, real income is equal to real disposable income. Y = YD 1 KM: The Multiplier Model - Principles of Macro - RIT - Dr. Jeffrey Burnette Consumption Function - Algebraic...
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...CHAPTER 9 Basic Macroeconomic Relationships A. Short-Answer, Essays, and Problems 1. Define the consumption and saving schedules. 2. Explain how consumption and saving are related to disposable income in the aggregate expenditures model. 3. Complete the following table assuming that (a) MPS = 1/5, (b) there is no government and all saving is personal saving. Level of output and income Consumption Saving $250 $260 $___ 275 ____ ___ 300 ____ ___ 325 ____ ___ 350 ____ ___ 375 ____ ___ 400 ____ ___ 4. Complete the following table assuming that (a) MPS = 1/3, (b) there is no government and all saving is personal saving. Level of output and income Consumption Saving $100 $120 $___ 130 ____ ___ 160 ____ ___ 190 ____ ___ 220 ____ ___ 250 ____ ___ 5. Differentiate between the average propensity to consume and the marginal propensity to consume. 6. What are the marginal propensity to consume (MPC) and marginal propensity to save (MPS)? How are the two concepts related? How are the two concepts related to the consumption and saving functions? 7. Suppose a family’s annual disposable income is $8,000 of which it saves $2,000. (a) What is their APC? (b) If their income rises to $10,000 and they plan to save $2,800, what are their MPS and MPC?...
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...Household saving in the United Kingdom and the United States rose significantly in 2008, even though the unemployment rate remained reasonably low (below 7%) in both countries. Discuss possible reasons for this trend in the light of theories of consumption. Effects of the 2008 financial turmoil hit the economic climate hard causing a shift in the behaviour of consumers as they decreased consumption and increased their savings rate. This is mainly due to erosion of confidence and high levels of uncertainty about expected future income. Consumers adapting to this change follow the assumption that they’re forward looking, they seek to maximise their utility from consumption over their lifetime and they’re prudent. The explanation of consumer behaviour is highlighted mainly by the Modern Lifecycle Model and concreted by the Certainty Equivalent Life Cycle Permanent Income Model (CE-LC-PI). There are a few additional factors that may have caused this rise in savings rate including debt reduction causing a decline in available credit and real wealth and changes in investment risk. The Life Cycle Model under Certainty (LCM), as stated by Modigliani and Brumberg (1954) suggests that individuals plan their consumption and savings behaviour over their lifetime in order to maximise their utility. Under the CE-LC-PI, households base their current spending decisions on their permanent incomes (the incomes they expect to receive on average over their entire lifetime). This model, unlike...
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...Mankiw, Macroeconomics 8e Chapter 3 1. The returns to scale in the production function Y = K0.5L0.5 are: A. decreasing. B. constant. C. increasing. D. subject to wide fluctuations. 2. If a production function has two inputs and exhibits constant returns to scale, then doubling both inputs will cause the output to: A. reduce by half. B. stay the same. C. double. D. quadruple. 3. If the supplies of capital and labor are fixed and technology is unchanging, then real output is: A. fixed. B. determined by demand. C. uncertain. D. subject to wide fluctuations. 4. If a production function has the property of diminishing marginal product, then doubling: A. all of the inputs will less than double the output. B. all of the inputs will double the output. C. all of the inputs will more than double the output. D. one of the inputs will reduce its marginal product. 5. Consider the following production table: Assuming that the production function displays constant returns to scale, what is the marginal product of labor when labor and capital are both equal to 1,000? A. 1 B. 5 C. 10 D. 20 6. Consider the following production table: By how much does the marginal product of labor decrease as labor input increases from 1 to 2 and from 2 to 3? A. 0 B. 1 C. 2 D. 3 7. Euler's theorem implies that if a production function exhibits constant returns to scale, then: A. economic profit is zero. ...
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...Lecture 6 and 7: The Aggregate Expenditures Model Reference - Chapter 7 learning OBJECTIVES 1. The factors that determine consumption expenditure and saving. 2. The factors that determine investment spending. 3. How equilibrium GDP is determined in a closed economy without a government sector. 4. What the multiplier is and its effects on changes in equilibrium GDP. 5. How adding international trade affects equilibrium output. 6. How adding the public sector affects equilibrium output. 7. The distinction between equilibrium versus full-employment GDP. I. Introduction A. This chapter focuses on the aggregate expenditures model. We use the definitions and facts from previous chapters to shift our study to the analysis of economic performance. The aggregate expenditures model is one tool in this analysis. Recall that “aggregate” means total. B. As explained in this chapter’s Last Word, the model originated with John Maynard Keynes (Pronounced Canes). II. Simplifying Assumptions for the Simple Model A. We assume a “closed economy” with no international trade. B. No Government. C. Although both households and businesses save, we assume here that all saving is personal. D. Depreciation and net foreign income are assumed to be zero for simplicity. E. There are two reminders concerning these assumptions. 1. They leave out two key components of aggregate demand...
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...Managerial Accounting Essay gsm access sites Power saving initiatives June 2013 Table of Contents 1. EXECUTIVE SUMMARY 3 1.1. Introduction …………….. 3 1.2. Afghanistan fuel prices and trends 3 2. FUEL SAVING INITIATIVES 4 2.1. DCB Hybrid power solution 4 2.2. Hydromix and ProGSM monitoring solution 4 a- Hydromix chemical solution ...……………………………………………………………………………… 4 b- Consumption control ..…………..………………….……………………………………………............... 5 c- Both solutions combined ……………..…………….………………………………………………………. 6 2.3. Solar solution 6 2.4. Summary table …….…………………………………………..…………………………………………….... 6 3. FUEL SAVING INITIATIVES COMBINED 7 4. ABREVIATIONS …………………………………………………………………………………………………… 7 executive summary 1 introduction In 2013 Etisalat Afghanistan fuel and power expenditures represent 37% of the total OPEX budget, it goes without saying that any initiative to reduce this cost will have a direct impact on the bottom line. In this documents we will describe qualitatively and quantitatively three saving initiatives that could contribute on reducing and controlling fuel and power expenditures. 2 afghanistan fuel prices and trends Fuel expenditures kept rising because of two reasons, international market price and Afghanistan currency devaluations. From 2006 (Etisalat Afghanistan...
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...the amount of consumption undertaken by a household is directly related to its income. Explain roughly what he meant. The higher your income, the higher your consumption is likely to be. People with more income tend to consume more than people with less income. 2. Draw a graph of the consumption function and explain what the vertical intercept means and the slope. Make sure to label both axes. The fact that the consumption function crosses the vertical axis at a positive value simply means that even if household income were zero there would still have to be consumption for the household to survive. It would either live off savings or borrow. The slope of the consumption function represents the fraction of each additional dollar of income that the households choose to consume. 3. Assume a consumption function that takes on the following algebraic form: C = $100 + .8Y. Assume that Y = $1000 what is the level of consumption at this income level. C = $100 + .8($1000) = $100 + $800 = $900. 4. Write out the equation for the consumption function in algebraic form and identify each component. C = a + bY C = consumption a = the amount of consumption when income is zero b = the fraction of each additional dollar of income devoted to consumption Y = income 5. Suppose the slope of the consumption function is .75 and there was an increase in income of $100. Calculate the increase in consumption. ( Y...
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...everywhere. Our BlueMotionTechnologies are already setting standards on the road. For us, building low-emission vehicles is just the beginning. Making the most of their efficiency potential and reducing fuel consumption even further are the next challenges we face together. This brochure was made for that purpose. It shows you just how little effort it takes to do something good – and helps you to save fuel. It’s time to Think Blue. Please join us. 3 Every metre counts. If you use less fuel today, there will be more for us all tomorrow: you’ll have more money in your pocket, we’ll all be doing something to protect the environment and we at Volkswagen will have an even greater incentive to build even more fuel-efficient cars. Today there are already many ways to drive more fuel-efficiently. To start with, it is important to know how manufacturers’ fuel consumption figures are put together. They are based on the New European Driving Cycle (NEDC) – a statutory method of calculating fuel consumption. The NEDC includes three consumption figures: urban, extra-urban and combined. These figures are used to compare the fuel consumption of different vehicles. And those who know that every vehicle’s fuel consumption depends on how that particular vehicle is used can easily make savings. Our tips will...
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...interest s payments, rents and other forms of earning received in a given period of time. B. Consumption. Consumption means the expenditures made by households on goods and services. Example, consumer durable products like washing machines are consumed immediately after purchase. C. Multiplier Concept. The process of generating income through the circular flow exchanges between the households and firms. Example, We focus on current consumption on such goods as food and household items like washing machines and oven toaster. this is in contract to expenditures on capital goods such as housing which service as prepayments of long-run consumption. D. Savings, the portion of disposable income not spend on consumption of consumer goods but accumulated or invested directly in capital equipment or in paying off a home mortgage, or indirectly through purchase of securities. E. Taste and preferences. Taste and preferences depend on how products satisfy one's desires. A chance in collective attitude can change aggregate taste and preference, and in turn change the consumption level and marginal propensity to consume. Example, a family residing in Ilocos may consume less of every peso of income than a family of the same income level in living in an urbanized area like Makati City or Cebu City. F. Population. Population size also determines consumption needs, and therefore affects consumption expenditures with a given income. example, a decrease in household size with income and other...
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...Energy Saving Through Smart Home By M.VINOD KUMAR 09H71A0256 K.V.P.CHAND 10H75A0206 EEE, B-tech IV year MIC College of Technology Kanchikacherla 1 Abstract-Energy saving is considered as one of the most important issue affects the consumers, power system quality and the global environment. The high energy demanded by home appliances, air conditioning and lighting makes homes to be considered as one of the most critical area for the impact of energy consumption. Smart home technology is a good choice for people not only care about security, comfort but energy saving as well. In this paper, a smart home energy management technique based on a set of sensors is presented. It minimizes the domestic energy waste and can be adapted according to the user habits. A proposed scenario is reported of daily routine and performed by 16 steps. Three assumptions of varying the time spent in each step according to different behaviour are examined. The effectiveness of the proposed set is shown based on a static correlation between the power consumption and saving. Keywords- Energy saving, smart home, occupancy sensor. I. INTRODUCTION Smart home technology started for more than a decade to introduce the concept of device and equipment networking in house. Smart home contains internal network and intelligent control on different home's services. The internal network can be built via wire or wireless communication technique between sensors and actuators .The intelligent control means the entire...
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...9/14/2010 Agenda • Course Overview • Valuing Payoff Streams • Intertemporal consumption: Saving and Borrowing • What To Take Away The Structure of the Course Today’s lecture Introduction to Markets Consumers and Producers Consumer Theory and Demand Uncertainty Technology and Production Microeconomics Perfect competition Monopoly and Pricing strategies Market Interaction Game Theory Competitive Strategy Auctions Information in Markets and Agency 1 9/14/2010 Agenda • Course Overview • Valuing Payoff Streams • Intertemporal consumption: Saving and Borrowing • What To Take Away How to value different streams of future payoffs? Would you rather get $5 dollars every year for the next 5 years or $10 dollars today? How does one compare streams of future payoffs? Let’s start by comparing two periods. What is the equivalent of $1 tomorrow? If the interest rate is R I could invest $1 and receive $(1+R) tomorrow. Conversely, I can borrow $1 today under the promise of paying back $(1+R) tomorrow. We will determine the value of a future payment by discounting them at the interest rate that could be earned. The interest rate R often is given on a yearly basis. How to discount a payment of $1 in 5 years time? By compounding we get that the Present Discounted Value (PDV) of $1 in 5 years is 1 (1 R)5 2 9/14/2010 Example So would you rather get $5 dollars every year for the next 5 years or $10 dollars today? It will...
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...importance of these three sources of output growth Growth Accounting and the Productivity Slowdown * One explanation for productivity slowdown is that there has not been a slowdown at all but rather is the result of a measurement error * Another explanation is that there was a slowdown due to the large increase in oil prices that occurred in 1970’s as a result of the actions of the OPEC oil cartel * Another explanation is that the productivity slowdown may have resulted from the onset of the revolution in information technology - Growth Dynamics: The Neoclassical Growth Model - * Growth accounting does not explain why capital and labor grow at the rates they do * The growth of capital stock is the result of the myriad saving and investment decisions of households and firms * This model is useful for examining three basic questions: What is the relationship between a nations long-run standard of living and its rate of technical progress? How does a nations rate of economic growth evolve over time? Do economic forces exist that will ultimately allow poorer counties to catch up in terms of standards of living? Setup of the Model * We assume that the population and work force both...
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...Saving and Investment Macroeconomics Assignment 1 Matthew Killeen 8173969 Professor: Octavian Strimbu Assignment - Saving and Interest Question: Many commentators, including high officials of the bank of Canada, have blamed the spending habits of the Canadian public for high interest rates. Are these commentators right? “It’s not your salary that makes you rich, it’s your spending habits.” - Charles A. Jaffe. Throughout the past 25 years, Canadians household savings rate have dropped severely resulting in the economy’s interest rates to rise in order to maintain stability. Many economists believe the increase in interest rates is due to the rise in consumer spending habits. In our current economy there is an evident relation between the diminishing house hold savings and the increase in interest rates in the Canadian public. When it comes to consumer spending and saving there is a clear trade-off, choosing to save now and consume more later, results in giving up current consumption. Many Canadians lose a good amount of their income due to enforced tax laws, causing them to spend instead of save. I agree with the the statement that the spending habits of Canadian Public is to be blamed because of high interest rates. The relationship between Canadians spending habits and high interest rates can be expressed through the supply and demand of loanable funds and the highly recognized Gross Domestic Product Equation. Since Canadian spending habits...
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...CHAPTER 16 Consumption Questions for Review 1. First, Keynes conjectured that the marginal propensity to consume—the amount consumed out of an additional dollar of income—is between zero and one. This means that if an individual’s income increases by a dollar, both consumption and saving increase. Second, Keynes conjectured that the ratio of consumption to income—called the average propensity to consume—falls as income rises. This implies that the rich save a higher proportion of their income than do the poor. Third, Keynes conjectured that income is the primary determinant of consumption. In particular, he believed that the interest rate does not have an important effect on consumption. A consumption function that satisfies these three conjectures is C = C + cY. C is a constant level of “autonomous consumption,” and Y is disposable income; c is the marginal propensity to consume, and is between zero and one. 2. The evidence that was consistent with Keynes’s conjectures came from studies of household data and short time-series. There were two observations from household data. First, households with higher income consumed more and saved more, implying that the marginal propensity to consume is between zero and one. Second, higher-income households saved a larger fraction of their income than lower-income households, implying that the average propensity to consume falls with income. There were three additional observations from short time-series. First, in years when aggregate...
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...consumption theory Introduction The Keynesian Theory of consumption is that current real disposable income is the most important determinant of consumption in the short run. Real Income is money income adjusted for inflation. It is a measure of the quantity of goods and services that consumers have buy with their income (or budget). For example, a 10% rise in money income may be matched by a 10% rise in inflation. This means that real income (the quantity or volume of goods and services that can be bought) has remained constant. The chart above shows how real disposable incomes and consumer spending have grown in recent years. This increase in real incomes has been a factor behind the yearly growth of consumer demand in each of the last nine years. The Keynesian Consumption Function Disposable Income (Yd) = Gross Income - (Deductions from Direct Taxation + Benefits) The standard Keynesian consumption function is as follows: C = a + c Yd where, C= Consumer expenditure a = autonomous consumption. This is the level of consumption that would take place even if income was zero. If an individual's income fell to zero some of his existing spending could be sustained by using savings. This is known as dis-saving. c = marginal propensity to consume (mpc). This is the change in consumption divided by the change in income. Simply, it is the percentage of each additional pound earned that will be spent. There is a positive relationship between disposable income (Yd) and consumer...
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