C = 6 + Y/2, so AD = 7 + Y/2
without actually 'explaining' that this is because AD = C + I, and 'I' happens to equal '1', so AD = 6 + Y/2 + 1, thus getting to the answer of AD = 7 + Y/2, that is what I call an explanation,
but Activity 3.4 is even worse.
Firstly : Figure
3.15 on page 125 has the Aggregate Demand value when Income (Y) = 0 annotated as
'a'.
As the
formula AD = a + bY + I
This must equal 'a + I' when Y = 0, so should this axis not be annotated correctly as 'a + I'.
This may seem a small point but it has caused me some serious problems when trying to understand where the new equilibrium of 6 billion for a propensity to save of 1/2 came from.
This must equal 'a + I' when Y = 0, so should this axis not be annotated correctly as 'a + I'.
This may seem a small point but it has caused me some serious problems when trying to understand where the new equilibrium of 6 billion for a propensity to save of 1/2 came from.
But I think I
can now see it now though.
AD = a + bY + I, a = 2, and I = 1 (these values from the previous example figure 3.14)
so,
- AD = 2 + bY + 1,
- AD = 3 + bY
- Y = 3 + bY, therefore divide all values/items by Y
- 1 = 3/Y + b, re-arrnage by subtracting b from both sides
- 1 - b = 3/Y,
- 1 - 2/3 = 3/Y
- 1/3 = 3/Y, multiply both sides by Y
- Y/3 = 3, multiply both sides by 3 and we get,
- Y = 9, for b=2/3, which we are told is correct.
Therefore for b = 1/2, propensity to Consume of 1/2, propensity to Save of 1/2, this means the equilibrium is,
- 1 - b = 3/Y
- 1 - 1/2 = 3/Y
- 1/2 = 3/Y, multiply both sides by Y
- Y/2 = 3, multiply both sides by 2 and we get,
- Y = 6,
This is where the 6 Billion came from - who would have guessed that at first glance ? Well obviously not me...........
So, with Y = 6, Consumption C = a + bY, which is 2 + 1/2*6 = 2 + 3 = 5, Consumption = 5 Billion.
So if Income = 6, Consumption = 5, savings must equal 1 which also equals investment, and Figure 3.16 comes to life and makes sense.
So there we have the explanation of the Paradox of Thrift..... well sort of.
Just section' 6 Functions of Money' to go and I'll only be 1/2 a week behind.
I am blaming being 1/2 a week behind the study plan on the fact that my Propensity to Study has been badly affected by the fact that I still have not had my TMA back - I'll maybe work on a formula to calculate this later.
5 comments:
It seems to be getting worse...
I emailed my tutor about tutorial 1 from week five (The components of aggregate demand), as I gave up and clicked to see the answers, but even once I saw it, I couldn't figure out where the answer came from.
My tutor couldn't figure it out either. No idea how I was supposed to calculate it.
(Hello, by the way. Found your blog a few weeks ago, and have been following since then! It's good to read another person's experiences from DD209.)
Thanks for your comments.
I think we are certainly suffering from the course being run for the first time, the text book seems riddled with mistakes and the second half of the course isn't on the website yet - or at least it wasn't last time I looked.
The saving grace is the subject is at least interesting, and I want to understand it. Although, I haven't finished Chapter 4 yet, and not having TMA01 back is a real demotivator.
Anyway, good luck with the course.
I spent a good two days crying - seriously snot producing sobbing - over that activity 3.4 because I just don't get the explanation in the book.
My tutor said she thought the book explanation was awful and put her own in. But all the talk of simultaneous equations just made me all waily waily and seriously considering giving up on the OU entirely.
Got over myself, got a not too bad TMA result and then hit activity 4.2 and the snot is building up again...
Hi Sho,
Thanks for this comment, I hadn't reached this yet but have had a look and its not that simple, you have to accept that the values 'a' and 'I' don't matter, mt take on it is....
AD = a + bY + I + G
AD = Y (at equilibrium)
Y = a +bY + I + G
Y – bY = a + I + G
Y(1 –b) = a + I + G
Y = a + I + G / (1-b)
Y = a + I + G / (1/2)
Y = 2 (a + I + G )
How much does Income increase with a Fiscal stimulus of £300M
Without any stimulus G = 0,
Y = 2 x a x I (or written as 2aI)
With £300M stimulus
Y = 2(a + I + £300M) = 2(a + I) + 2(£300M)
Y = 2ai + £600M
So as with G = 0, Y = 2aI,
with G = £300M, Y = 2aI + £600M,
we can say that as the 2aI amount is equal the benefit of the £300M stimulus is an extra £600M income.
I agree that this is not really explained very well, I have had to have a real think about this.
Hope this is of use....
Oops, nearly got it right above, but rushing and so made a daft mistake - although ultimately did not change the answer.
Corrected it is:
How much does Income increase with a Fiscal stimulus of £300M
Without any stimulus G = 0,
Y = 2 x (a + I)
With £300M stimulus
Y = 2(a + I + £300M) = 2 x (a + I) + 2(£300M)
Y = 2 x (a + I) + £600M
So as with G = 0, Y = 2(a +I),
with G = £300M, Y = 2(a + I) + £600M,
we can say that as the 2(a + I) amount is equal, the benefit of the £300M stimulus is an extra £600M income.
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