chapter 21 Flashcards
(41 cards)
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
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
3
Q
AE
A
- desired spending by consumers, businesses, governments and foreigners
- AE = C + I + G + (X - IM)
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
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)
6
Q
Yd
A
- after tax income = Y - taxes
7
Q
personal saving
A
- amount after tax not consumed
- S = Yd - C
8
Q
consumption schedule
A
- table showing amounts households plan to spend for consumer goods at various levels of consumer income
9
Q
saving schedule
A
- table showing amounts households plan to save at different levels of disposable inocme
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
11
Q
average propensity to save (APS)
A
- fraction of Yd that households plan to save
- increases as disposable income rises
12
Q
break even income
A
- level of disposable income at which households plan to consume all income and save none
13
Q
APC + APS =
A
1
- bc all income must be consumed or saved
14
Q
marginal propensity to consume (MPC)
A
- slope of the consumption function
15
Q
MPC + MPS =
A
1
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
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
paradox of the thrift
- 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
3 categories of investment
- inventory accumulation, residential construction, new plant equipment
27
investment expenditure is
- most volatile component of GDP
| - strongly associated with aggregate economic fluctuations
28
3 determinants of desired investment expenditure
- real interest rate
- changes in level of sales
- business confidence
29
simplifying assumption of investment
- investment as autonomous expenditure
30
aggregate expenditure function
- relates to the level of desired aggregate expenditure to the level of actual national income
- AE = C + I
31
eqm national income
- occurs when the desired aggregate expenditure = actual level of national income (or GDP)
- When AE = Y
- to get eqm output set Y = AE
32
if AE > Y
inventories falling adn there is pressure for actual national income to rise
33
if AE < Y
inventories are rising and there is pressure for actual national income to fall
34
two types of shifts in AE
- parallel shift
| - change in slope of AE
35
parallel shift in AE
- 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
shift in slope of AE
- change in MPC
| - increase in MPC: taxation levels decrease, availability of credit increases, consumer confidence increases
37
the multiplier
- relationship between changes in autonomous spending and changes in real GDP
- an increase in I will lead to a change in output
38
the multiplier effect
- a change in spending (ex. investment) changes real GDP more than the initial change in spending
39
the simple multiplier
z: marginal propensity to spend
- delta Y/delta A
- 1/(1-z)
40
size of MPC matters
- the larger the MPS, the steeper the AE function and the larger the simple multiplier
41
economic fluctuations as self fulfilling prophecies
- 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
