Aggregate Demand and the Multiplier Flashcards
the total income received by all factors of production in a given period (another way to get Real GDP)
Aggregate Income
Inverse relationship between Price Level and the Quantity of Aggregate Output
Downward Sloping AD Curve
relative incomes, relative prices, exchange rates
Determinants of Net Exports
MPC/MPS
Transfer Multipliers
the factor by which a change in both spending and taxes changes real GDP
Balanced Budget Multiplier
Price Level (PL)
Vertical Axis of AS/AD Graph
Real GDP (Y)
Horizontal Axis of AS/AD Graph
the economy’s total production of goods and services for a given time period (aka Real GDP)
Aggregate Output
the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports, is the total spending on domestically produced final goods and services in the economy (aka Real GDP)
Aggregate Spending
C + I + G + NX
The Aggregate Demand Curve
the change in consumption brought about by a change in real wealth that results from a change in the price level
Real Wealth Effect
The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).
Interest Rate Effect
a lower price level causes exports to become relatively cheaper, which stimulates spending on net exports
Exchange Rate (foreign purchases) Effect
Wealth Effect, Interest Rate Effect, Exchange Rate Effect
Reasons AD Curve is Downward Sloping
Change in Consumption, Investment, Government Spending or Net Exports
What causes a shift in AD
Wealth, Income, Income Taxes, Expectations of Economic Conditions, Interest Rates
Determinants of Consumption
the value of assets owned
Wealth
earnings from work or investment
Income
Taxes on income, both earned (salaries, wages, tips, commissions) and unearned (interest, dividends).
Income Taxes
Consumers expect changes in economic conditions in the near future, which impacts how much they consume today.
Expectations of Economic Conditions
the cost of borrowing money
Interest Rates
Automobiles, College Education, Durable Goods (e.g. appliances)
Interest Rate Sensitive Components of Consumption
Expectations of Future Economic Conditions, Interest Rates, Unplanned Changes in Business Inventory
Determinants of Investment
When economic conditions change and as a result businesses struggle selling their product and their inventory rises.
Unplanned Changes in Business Investory
Government policy that attempts to manage the economy by controlling taxing and spending.
Fiscal Policy
Fiscal Policy
Determinants of Government Spending
the management of the money supply and interest rates by the Federal Reserve
Monetary Policy
Households (C), firms (I), and government (G) must spend money on certain things regardless of how much income they generate
Automonous Expenditure
the increase in consumer spending when disposable income rises by $1
Marginal Propensity to Consume (MPC)
the increase in household savings when disposable income rises by $1
Marginal Propensity to Save (MPS)
Income remaining for a person to spend or save after all taxes have been paid
Disposable Income
1/MPS
Spending Multiplier
-MPC/MPS
Tax Multiplier
