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At first, it may seem obvious that consumption will rely on Y. If GDP is doubled in real terms over a number of years, government consumption, private consumption and investment will also each roughly be doubled. If you draw a graph of GDP and consumption over time you see that consumption does grow by about the same rate as GDP.
Though from this reasoning, we can't conclude that C relies on the Y since growth has been removed from our variables C and Y. We need to think of Y as a variable which varies over time around some average. Sometimes it is above the average and sometimes it's below the average however there is now upward trend. The same is true for C.
The crucial question then is whether consumption is above its average in periods when GDP is above its average and vice versa (technically, if detrended variables are correlated over time).
Consider the multiplier model we have studied in class. Assume that the economy is initially in equilibrium and that real income is $180. The marginal propensity to expend is 0.66.
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what wil hapen to the real wage if the nominal wages and prices rise at the same rate per year?
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Scope of Economics
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What were the key provisions of the economic stimulus bill passed by congress in February 2008? What further changes in fiscal policy have occurred since this time?
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