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macroeconomics > chapter 21 > Flashcards

chapter 21 Flashcards

1
Q

aggregate expenditure model

A
  • the amount of goods and services produced and the level of employment depends on the level of aggregate expenditure (total spending)
  • businesses will only produce what they can profitably sell
  • key assumption: prices in the economy are fixed
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2
Q

desired aggregate expenditure

A
  • actual values of expenditures indicated by Ca, Ia, Ga, (Xa-IMa)
  • desired: same letters but no subscript
  • what consumers and firms want to purchase given real world constraints of income and market prices
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3
Q

AE

A
  • desired spending by consumers, businesses, governments and foreigners
  • AE = C + I + G + (X - IM)
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4
Q

AE assumptions of the simple short run macro model

A
  • no trade with other countries (closed economy)
  • no government (and no taxes)
  • price level is constant
  • left with AE = C + I
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5
Q

desired consumption expenditure

A
  • income consumption and income saving relationships
  • determined by: disposable income, wealth, interest rates, expectations about the future
  • most important factor is disposable income (Yd)
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6
Q

Yd

A
  • after tax income = Y - taxes
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7
Q

personal saving

A
  • amount after tax not consumed

- S = Yd - C

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8
Q

consumption schedule

A
  • table showing amounts households plan to spend for consumer goods at various levels of consumer income
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9
Q

saving schedule

A
  • table showing amounts households plan to save at different levels of disposable inocme
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10
Q

average propensity to consume (APC)

A
  • fraction or percentage of Yd that households plan to spend on consumer goods and services
  • decreases as income rises
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11
Q

average propensity to save (APS)

A
  • fraction of Yd that households plan to save

- increases as disposable income rises

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12
Q

break even income

A
  • level of disposable income at which households plan to consume all income and save none
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13
Q

APC + APS =

A

1

- bc all income must be consumed or saved

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14
Q

marginal propensity to consume (MPC)

A
  • slope of the consumption function
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15
Q

MPC + MPS =

A

1

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16
Q

wealth effect on consumption

A
  • higher wealth wil make consumption rise and saving fall
  • ## wealth effect: effect of a rise in asset values on consumption and saving
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17
Q

borrowing effect on consumption

A
  • allows consumption to rise above disposable income but must be repaid in future
  • consumption will increase if interest rates decrease
18
Q

expectations effect on consumption

A
  • expectations of higher prices tomorrow may cause households to buy more today, making consumption rise and saving fall
19
Q

real interest rates effect on consumption

A
  • when real interest rates fall, households tend to borrow more, consume more and save less
20
Q

taxation

A

a change in taxes shifts both consumption and saving schedules in the same direction

21
Q

switching to real GDP

A
  • use real GDP (Y instead of Yd) to understand how changes in C and S affect output of entire economy, not just Yd
22
Q

changes along schedules

A

movement from one point to another on the consumptions schedule is solely caused by a change in Yd (or GDP)

23
Q

simultaneous shifts

A

changes in wealth, borrowing, expectations and interest rates shift the consumption schedule in one direction and saving in another

24
Q

stability

A

the consumption and saving schedules are usually stable unless altered by major tax increases or decreases

25
Q

paradox of the thrift

A
  • recession can be made worse when households become thrifty
  • saving is good for the economy (long run growth, will lead to higher investments)
  • in recession, greater S may not lead to greater investment, greater S just less spending and leads to more layoffs
  • if each individual saves more = less spending, more job losses, decreases in income, less saving overall
26
Q

3 categories of investment

A
  • inventory accumulation, residential construction, new plant equipment
27
Q

investment expenditure is

A
  • most volatile component of GDP

- strongly associated with aggregate economic fluctuations

28
Q

3 determinants of desired investment expenditure

A
  • real interest rate
  • changes in level of sales
  • business confidence
29
Q

simplifying assumption of investment

A
  • investment as autonomous expenditure
30
Q

aggregate expenditure function

A
  • relates to the level of desired aggregate expenditure to the level of actual national income
  • AE = C + I
31
Q

eqm national income

A
  • occurs when the desired aggregate expenditure = actual level of national income (or GDP)
  • When AE = Y
  • to get eqm output set Y = AE
32
Q

if AE > Y

A

inventories falling adn there is pressure for actual national income to rise

33
Q

if AE < Y

A

inventories are rising and there is pressure for actual national income to fall

34
Q

two types of shifts in AE

A
  • parallel shift

- change in slope of AE

35
Q

parallel shift in AE

A
  • there is an increase in autonomous spending
  • households experience overall increase in wealth that leads them to increase their planned expenditure at each level of income
36
Q

shift in slope of AE

A
  • change in MPC

- increase in MPC: taxation levels decrease, availability of credit increases, consumer confidence increases

37
Q

the multiplier

A
  • relationship between changes in autonomous spending and changes in real GDP
  • an increase in I will lead to a change in output
38
Q

the multiplier effect

A
  • a change in spending (ex. investment) changes real GDP more than the initial change in spending
39
Q

the simple multiplier

A

z: marginal propensity to spend
- delta Y/delta A
- 1/(1-z)

40
Q

size of MPC matters

A
  • the larger the MPS, the steeper the AE function and the larger the simple multiplier
41
Q

economic fluctuations as self fulfilling prophecies

A
  • expectations about future state of economy infleuces desired C and I
  • changes in desire AE will (through multiplier process) lead to changes in national income
  • link btwn expectations and national income suggests that expectations about a healthy economy will actually produce a healthy economy

macroeconomics (5 decks)

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