Chapter 3

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Chapter 3: The Simple Model with Government Money

Model SIM

The graphs below capture various variables as a result of a permanent change in government expenditure (slider).
Figure 3.1 compares the long-run equilibrium output Y* with the actual output Y.
Figure 3.4 shows the household behavior across three variables; Disposable income (YD), consumption (C), and wealth (HH).
Figure 3.1b shows the rate of growth of wealth.
FIgure A3 .1 highlights the mean leg theorem which shows that if government increases its spending, tax revenue will eventually catch-up with the expenditure in the long-run.


Figure 3.8 shows the short-run impact of a consumption shock to the economy. As the marginal propensity to consume (MPC) out of income goes up, the demand goes up as well. A higher proportion of income being spent on consumption forces savings to fall resulting in lower wealth levels. This in turn affects the consumption of out wealth to fall. In a steady state, this results in pre-MPC shock levels of output and consumption with lower wealth levels.

Model SIMEX


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