TheShortRunMacroModel.pptVIP

The Short-Run Macro Model Spending is very important in short-run The more income households have, the more they will spend Spending depends on income But the more households spend, the more output firms will produce More income they will pay to their workers Thus, income depends on spending In short-run, spending depends on income, and income depends on spending Many ideas behind the model were originally developed by British economist John Maynard Keynes in 1930s Short-run macro model focuses on spending in explaining economic fluctuations Explains how shocks that affect one sector influence other sectors Causing changes in total output and employment Thinking About Spending Spending on what? In short-run macro model, focus on spending in markets for currently produced U.S. goods and services Things that are included in U.S. GDP Need to organize our thinking about markets that contribute to GDP What’s the best way to categorize all these buyers into larger groups so we can analyze their behavior? Macroeconomists have found that the most useful approach is to divide those who purchase the GDP into four broad categories Households, whose spending is called consumption spending (C) Business firms, whose spending is called planned investment spending (IP) Government agencies, whose spending on goods and services is called government purchases (G) Foreigners, whose spending we measure as net exports (NX) Should we look at nominal or real spending? When discuss “consumption spending,” we mean “real consumption spending” Consumption Spending Natural place for us to begin our look at spending is with its largest component Consumption spending Total consumption spending is sum of spending by over a hundred million U.S. households What determines total amount of consumption spending? One way to answer is to start by thinking about yourself or your family What determines your spending in any given month, quarter, or year? Disposable Income First thing that comes to mind is