Aggregate Demand and the Multiplier Flashcards
what is aggregate expenditure?
the total amount of goods and services that
people want to buy across the whole economy
what is aggregate expenditure the sum of?
Consumption Planned + Investment + Government purchases + Net exports
when does macro equilibrium occur?
occurs when the quantity of output that suppliers collectively produce is equal to the quantity of output that buyers collectively want to purchase
what does the output gap focus on?
the balance between short-run demand for output and long-run supply of output
what is equilibrium output?
the level of output at the point of macroeconomic equilibrium
what is potential output?
the economy’s highest sustainable level of production
what is autonomous consumption?
the fixed amount one will spend
what is the multiplier effect?
The total change in output can be greater than the initial change in aggregate demand
what is the marginal propensity to consume?
the fraction of extra income that a household consumes rather than saves
what is the marginal propensity to save?
the fraction of extra income that a household saves rather than consumes
formula for marginal propensity to consume :
1/(1 - MPC)
formula for marginal propensity to save:
1/MPS
how is aggregate demand calculated?
consumption function + investment
why is the multiplier important?
because it shows how the economy can amplify the impact of changes in spending.
what does MPT stand for?
marginal propensity to taxation
