Supply = GDP
Demand = Total Spending
Demand = Consumption + Investment + Gov. Expenditure + Exports - Imports Demand = C + I + G + X - IM
Taxes and imports rise when people's income is higher, thus spending line is flatter, and the multiplier effect is smaller it takes a larger increase in G or a larger tax cut to significantly raise GDP
Equilibrium is defined by a 45 line in spending-income axises
MPC is the slope of consumption function
Consumption function is the relationship between C and I
MPC = Change in C / Change in GDP
MPC is a fraction ( 0 < MPC < 1 )
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the ratio of, change in overall demand, change in one component of demand, so does it also = change GDP / Change C ?
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MPC + MPS = 1, and
Multiplier = 1/(1-MPC) = 1/MPS
Positive Influence, People's Income ( I ), Gov. Expenditure ( G ), Amount of Exports ( X )
Negative, Price of Goods ( CPI ), Taxes ( T ), Borrowing Costs ( Interest Rate i )
Change in Price: Movement along the AD Curve
Change in nonprice: Shift, to Left: Decrease in demand, to Right: Increase in demand
Positive, Price, Technology
Negative, Input Price, Price of Foreign Exchange, Taxes ( T )
Change in Product Price: Along
Change in nonprice: Shift, to Left: Decrease, to Right: Increase
potential GDP is a straight line