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Expected Output

aggregate private spending (A)  

  • A(Y,T,r) = C(Y-T) + I(Y,r)
  • Y = C(Y-T) + I(Y,r) + G = A(Y,T,r) + G
  • increasing function of income (Y)
  • decreasing function of taxes, real interest
    • higher taxes >> less consumption >> less private spending
    • higher interest rates >> less willing to invest >> investment decreases >> less private spending
  • include expectations >> Y = A(Y,T,r,Ye,Te,re) + G
    • increase current/expected income >> increase private spending
    • increase current/expected taxes or real interest >> decrease spending
    • steeper than previous IS curve
    • w/ expectations being considered, changes in current values don't affect output as much as before
  • changes in Y, r >> move along curve
  • chanages in T, G, expected values >> shift curve

LM relation - doesn't change w/ expectations  

  • M/P = Y L(i)
    • money supply equals money demand
  • how much money consumer wants to hold depends only on current level of transactions, not expected transactions in the future
  • opportunity cost of holding money depends only on current nominal interest rate

 

  • IS relation
  • LM relation
  • large changes in interest produce much smaller changes in output w/ steeper IS relation
Subject: 
Economics
Subject X2: 
Economics

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