CH 11 Flashcards
Who invented the Short-Run Macro Model and when?
What does is focus on? What does it contrast?
John Maynard Keynes in the 1930’s
It focuses on spending, that spending is the best way to affect/increase GDP.
Contrast “classical economics”
Short-Run Macro Model:
____1___ depends on ______2___?
How does 1 increase? 4 ways!!
(Consumption) Spending depends on Income and Income (of Businesses) depends on spending.
Spending increases when:
- -Disposable Income Rises
- -Wealth Rises
- -Interest Rates decrease
- -Households become more optimistic about the future
What is disposable income? give the formula
How much money you have to spend on whatever
= (Income- Net Taxes)
What is Net Taxes?
Net Taxes= Taxes - Transfer Payments
What is the Consumption Function?
What are the two variables?
Give the Consumption Equation
Consumption Function is a positive sloped, linear relationship between Consumption Spending and Disposable Income.
C= A + B x Disposable Income
A– Vertical Intercept– (Autonomous Consumption)
B— Slope (MPC)
What is autonomous consumption?
Where is is on the Consumption Function (x=?)
Autonomous Consumption is the part of consumption spending that is independent of disposable income.
It is at (x=0) also vertical intercept. This means disposable income is equal to 0!
What is the Marginal Propensity to Consume (MPC)?
How is it related to the consumption function?
—Give the equation—
The amount by which consumption spending rises when disposable income rises by one dollar.
–Represents the amount of $1 that you would spend–
This is the SLOPE of the Consumption line:
Change in Consumption/
Change in Disposable Income
=MPC
What is the Consumption-Income (C-I) Line?
The line based on Consumption Spending and Real Income (also GDP!!!)
What shifts ALONG (right/left) the C-I Line?
INCOME! Shifts ALONG the C-I line.
An Increase (right) in Income -> Increase (right) in Disposable Income -> Increase in Consumption Spending
What shifts the C-I Line Upward/Downward?
Taxes and Autonomous Consumption
Decrease in taxes-> Increase (shift Up) the C-I Line
Increase in ATC -> Increase (shift Up) the C-I Line
What is Aggregate Expenditure?
How is investment different in this?
How do you calculate change in AE?
AE= C+ Ip + G + NX
Ip— Planned Investment- does NOT include change in inventories. ( I - Change In Inventory= Ip)
Change in AE = Change in GDP (income) x MPC
Equilibrium GDP
Where the level of output (GDP) is equal to the Aggregate Expenditure (AE). Production= Spending
{GDP=AE}
How is equilibrium GDP related to change in inventory?
What if AE> GDP? What is the change in inventory and how will GDP be affected in the future?
What about AE < GDP ?
The change in inventory is always equal to
=GDP-AE
AE > GDP –> Change Inventory < 0
} Future GDP will Increase
AE < GDP –> Change in Inventory > 0
} Future GDP will decrease
AE vs GDP Diagram; what does it show? Why do we use it?
What is the 45 degree line?
Shows AE against the GDP. Used to find equilibrium GDP!
The 45 deg line is a translator line, anything on the x axis is also the same value on the y axis.
AE vs GDP Diagram; what does it show? Why do we use it?
What is the 45 degree line?
Shows AE against the GDP. Used to find equilibrium GDP!
The 45 deg line is a translator line, anything on the x axis is also the same value on the y axis.
