Chap 12 Flashcards
(18 cards)
Aggregate expenditure model
the short run relationship between total spending and real GDP, assuming that the price level is constant
In the long run, when consumption goes down, GDP goes
up
In the short run, when consumption goes down, GDP goes __ and Unemployment
GDP goes down and unemployment goes up
4 components of aggregate expenditure
Consumption, investment, government purchases and Net exports
CIGSNX
When AE > GDP, inventories __
decline = expansion at first
When AE < GDP, inventories__
increase = recession
5 variables of consumption
- Current disposable income: income-taxes
- Household wealth: value of you (house, stocks)
- Expected future income
- Price level: when price goes up, we spend less dollars (which means that the real value of $ decreases)
- Interest rate: when the rate increases, we spend less
marginal propensity to consume MPC
slope of the consumption function: changes in consumption /disposable income changes
Marginal propensity to consume formula
MPC = Change in Consumption / Change in YD (disposable income)
4 Variables that determine investment
- expectations of future profitability
- The interest rate
- Taxes
- Cash Flow
Expectations of future profitability
higher return, higher profit
interest rate
when it goes up, the investment goes down
Taxes
When taxes go up, profitability goes down, investment goes down
Variables that affect Net Exports
- The price level in the USA relative to the price levels in other countries
- The growth rate of GDP in the USA relative to the growth rate rates in other countries
- The exchange rate between the dollar and other currencies
The multiplier effect
The process by which an increase in autonomous expenditure leads to a larger increase in real GDP
-The MPC determines how much the GDP or AE will increase or decrease
Autonomous expenditure
an expenditure that does not depend on the level of GDP
Multiplier formula
M = change in GDP / change in investment
positive when you spend
negative when you cut spending
The aggregate demand curve
inverse relationship: price level causes AE to fall and decreases in the price level causes aggregate expenditure to rise
