Unit 5 Flashcards
(27 cards)
What is the equation for the multiplier
1/ 1 - mpc
How do you find the marginal propensity to consume
MPC = ^ consumer spending / ^ disposable income
What is the marginal propensity to save
MPS = 1 - MPC
What does the multiplier assume
Changes in overall spending leads to real aggregate output
the interest rate is given
gov purchases, taxes and transfers are all zero
there is no foreign trade
How do you find the GDP
consumer spending + investment spending
What is autonomous change in aggregate spending (^AAS)
This is an initial change in desired level of spending by firms, households, or government, at a given level of real GDP
What is the multiplier
The multiplier is the ratio of total change in real GDP to the size of that autonomous change
What is the consumption function equation
c = a + MPC x yd
What is the consumption function (definition)
It is an equation showing how an individual households consumer spending varies with the households current disposable income
What is the aggregate consumption function
This is the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending
Same form as consumption function but at an aggregate level
What does aggregate mean
It means that you are taking a measure for the whole economy
What causes shifts in the aggregate consumption function
changes in expected wealth
changes in aggregate wealth
What is planned investment spending
This is investment spending that businesses plan to undertake during a given period
What does planned investment spending depend negatively on
the interest rate
existing production capacity
What does planned investment spending depend positively on
expected future real GDP
What are inventories
They are stocks of goods that are held to satisfy future sales
What is inventory investment
It is the value of the change in total inventories held in the economy during a time period
If inventories have reduced then investment inventory is negative
What is unplanned inventory investment
Occurs when the actual investment is more or less than businesses expected, leading to unplanned changes to inventory
If the business had an influx of sales and needed more inventory then unplanned inventory investment would be negative
What is actual investment spending
this is the sum of planned investment spending and unplanned inventory investment
What is planned aggregate spending equation
AEplanned = C + Iplanned
What is planned aggregate spending
this is the total amount of planned spending in the economy, which includes consumption spending and planned investment spending
What does it mean when real GDP is higher then AEplanned
Negative
If sales are higher than expected, ending inventories will be lower than expected, and unplanned inventory investment will be negative
What does it mean when real GDP is less then AEplanned
This is associated with positive unplanned inventory investment
This is when firms have overestimated the number of sales leading to a increase in inventory
When planned aggregate spending is less then Y, what is unplanned inventory investment
Negative, there is an unexpected increase in inventories and firms reduce production
