AE and Business Cycle Flashcards
Factors of Consumption
Expectations / Confidence Stock of Wealth Interest Rates Disposable Income Household Debt
Factors of Investment
Expectations
Interest Rates
Profitability
Gov. Policies
Government Spending
Domestic Growth
Net Exports
World economic growth
Domestic economic growth
ToT
ER
Percentage of C, I, G, X-M in AE
C = 56% I = 20% g = 25% x-m = -1%
Unplanned inventory accumulation
Higher level of income = planned spending less than output = increase in inventories
Decreased production, output, employment and income
Unplanned negative inventory
Lower level of income = planned spening more than output = decreased inventories
Increased aggregate output, production, income and employment
At Equilibrium:
AE =GDP
Inventories, saving and dissavings, output and income level
Aggregate Expenditure
Amount that firms, households, government and overseas plan to spend on goods and services at each level of income
Multiplier
Factor that measures the amount by which GDP changes after initial expenditure. There is a proportionally larger impact on GDP since one person’s spending becomes another’s income.
Size of multiplier determined by MPC
Formula for multiplier
k = 1 / (1 - MPC)
MPC Formula
rise / run
Tax cut multiplier
( 1 / (1 - MPC) ) - 1
consumption function formula
C = a + bY
How to find final GDP after AE 2
- Find gradient, slope, MPC on AE1
- Size of multiplier
- Initial investment x multiplier
- impact of investment + GDP1 = GDP2
