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Flashcards in ECON CH 8 Deck (27):
1

aggregate output (Y)

is the total quantity of goods and services produced (or supplied) in an economy in a given period

2

aggregate income (Y)

is the total income earned by all factors of production in a given period

3

closed economy without government

Y=AE=C+I
aggregate output=aggregate input

4

household consumption

is the amount of spending by households on goods and services produced in our economy

5

consumers spending behavior is determined by (3)

1. household income and wealth
2. interest rates
3. households expectations about the future

6

keynes believed that household consumption is directly related to

its income

7

aggregate consumption function

is the pos relationship between aggregate income (Y) and aggregate consumption ©

8

marginal propensity to consume (MPC)

the fraction by which consumption increases when income increases, on average by a dollar

9

the slope of the consumption function = change in consumption divided by change in aggregate income is

MPC

10

aggregate consumption function

C=100+.75Y

11

change in inventory cannot be planned by who

firms; it is determined by how much households decide to buy

12

planned investment is

fixed; I=25, it does not change when income changes

13

planned aggregate expenditure (AE)

is the total amount the economy plans to spend AE=C+I

14

equilibrium

Y=AE
aggregate expenditure=aggregate income

15

what would happen to output (Y) when AE changes (increases)?

output changes by more than AE does

16

multiplier

is the ratio that determines by how much the equilibrium level of Y will change in response to a change in AE

17

investment multiplier

is the change in output resulted from a change in investment

18

the size of the multiplier depends on

MPC (the slope of the AE line)

19

multiplier equation

1/1-MPC

20

the size of the multiplier in the US economy is about

1.4

21

business firms make decisions based on

inventory change

22

the economy adjusts towards equilibrium in response to

firms` production adjustments (change in inventory helps the economy stay in equilibrium)

23

production equation=

total sales+ change in inventory

Y= AE+change in inv

24

change in inventory equation=

Y-AE

25

if change in inventory is less than 0

then firms increase production

26

if change in inventory is greater than 0

then firms reduce production

27

if change in inventory=0

then firms keep producing the same