Aggregate Expenditures Flashcards
Aggregate expenditures
The current value of all finished goods and services. GDP=AE=C+I+G+(X-M). Consumption is a major factor
Savings S
The difference between income and consumption, the amount of a disposable income not spent
Disposable income Y
Income remaining after deduction of taxes C+S
Average propensity to consume APC
The percentage of income that is consumed APC=Consumption/disposable income
Average propensity to save APS
The percentage of income that is saved APS=savings/disposable income. APS+APC=1
What do average propensity to consume and save represent?
Represent the proportion of income that is saved
What does marginal propensity measure?
Part of additional income that is saved or consumed
Marginal propensity to consume MPC
The change in consumption associated with a given change in income. MPC=change in consumption/change in disposable income
Marginal propensity to save MPS
The change in consumption associated with a given change in income MPS=Change in savings/change in disposable income. MPC+MPS=1
Determinants of consumption and savings
Wealth, expectations, household debt, taxes
Investment
Spending by businesses that adds to the productive capacity of the economy. Depends on rate of return, level of tech, business expectations about the economy
Determinants of demand
Expectations, tech changes, operating costs, capital goods on hand
On what does aggregate investment based?
It is based on c and I
Keynesian macroeconomic equilibrium
All injections are equal to all withdrawals. There are no pressures pushing the economy to a higher or lower level of output
Formula of spending multiplier K
K=1/1-MPC=1/MPS
What things do equal to each other at equilibrium?
Aggregate savings equal aggregate investment
What changes change in increased spending
Income is changed by more than the initial change in spending
In what does the paradox of thrift result?
Households wants to save more but at equilibrium they end up saving less
Injection
Increase of spending, including investment, gov spending, and exports
Formula of tax multiplier
Tax multiplier=MPC/1-MPC < spending multiplier by a value of 1
Does the increased or decreased taxes have any impact and on what?
It has less impact on income, employment, and output than an equivalent change in government spending
Balanced budget multiplier
Equal changes in gov spending and taxation (a balanced budget) lead to an equal change in income. Balanced budget equals to 1
What are injections and withdrawals?
Exports are injections and imports withdrawals
GDP gap
The difference between actual income and potential income (GDP at full employment). Can be positive or negative
Recessionary gap
The increase in AS needed (when expanded by the multiplier) to bring a depressed economy back at full employment
Inflationary gap
The spending reduction necessary (when expanded by the multiplier) to bring an overheated economy back to full employment
