23. Consumption, saving and withdrawals functions in the Keynesian analysis. Injections and their determinants.

Important assumptions in the Keynisian analysis

1. Absence of inflation-amount of money corresponds to the change in AD and av int rate is fixed.

2. absence of bus fluctuations(Inj=W)

3. Injections-exodiness var(doesn’t depend on Y in the short run).W and Cd-endogenouss(depend on Y)

The consumption of domestically produced goods and services( C_d) – the direct flow of money payments from households to firms.

Consumption function:

The main determinant of national consumption is national income. This relationship may be illustrated with the consumption function C=f(Y) and 45* line diagram.

Description of diagram:

1. Y influnces directly on C

2. At low level of income befor point of intersection (A) consumption function lies above 45 degre line. It means that nation spends more than it earns-dissaving.

3. At point A cons=nat income, that is nation spend all its income corresponded to A. A is called break-even point.

4. After p. A cons is less than nat income (other part goes on saving)

The slope of con function depends on marginal propencity to consume (mpc-a proportion of arise in Y that goes on consumption mpc=∆C/∆Y, apc-is the proportion of total national income that goes on consumption apc=C/Y)

Withdrawals(W)(or leakages) – income of households or firms that are not passed on round the inner flow. Withdrawals equal net savings(S) plus net taxes(T) plus import expenditure(M): W=S+T+M

1.Savings

mps-proportion in the incr of Y saved=∆S/∆Y

aps-proportion of Y saved=S/Y

Non-income determ:

1. 1.wealth and distribution of income

2. 2.level of taxes

3. 3interest rate

4. 4.expectations of future prices

5. 5.personal motivation to save.

2.Taxes

Types:

1. 1.Lump-sum –no changes in T when Y rises

2. 2.Proportional-T rise proportional as Y rises

3. 3.Progressive-T rise more intensivle than Y

4. 4.Regressive-T rise less int than Y

• Mpt-proportion of rise in Y payed in tax=∆T/∆Y

• Apt-proportion of Y payed in T=T/Y

Non-income detetm:

• 1.tax rates

• 2.size of underground economy

3.Imports

1. M of luxury goods 2. M of basic g&s

mpm-proportion of rise in Y that goes abroad=∆M/∆Y

apm-proportion of Y that goes abroad=M/Y

Non-income determin:

• 1.relative prices-if domestic prices are higher than imported than people prefer to buy imported

• 2.relative quality-if quality of imported is better than domestic M rises

• 3.Relative interest rates-if foreign int rayes rise relative to domestic,more money will flow abroad, M rises

• 4.exchange rate-if people expect exchange rate is about to depriciate,there will be an outflow of capital, M rises

• 5.preferences

• 6.total consumption

Injections(J) – expenditure on the production of domestic firms coming from outside the inner flow of the circular flow of income. Injections equal investment(I)plus government expenditure(G) plus expenditure on exports(X). J=I+G+X

Injections

1.Investment

1. a)real interest rate-the higher the interest rate the more expensive is borrowing and the less I

2. b)capacity and stocks-the more capacity the less I

3. c)expected rate of net profit-I depends on firms expectations about future marker conditions.

2.Gov expenditure-the higher level of Y, the higher amount of Trevenue,the more it can afford to spend in the long run.

3Exports-the same determinants as import.