Ch. 11 Spending & Output in the Short Run Flashcards
Menu costs
the costs of changing prices
Planned Aggregate Expenditure, PAE
Total planned spending on final goods and services
Consumption function
The relationship between consumption spending and its determinants, in particular disposable income
Autonomous consumption
Consumption spending that is not related to the level of disposable income
Wealth effect
The tendency of changes in asset prices to affect households’ wealth and thus their consumption spending
Marginal propensity to consume, MPC
The amount by which consumption rises when disposable income rises by 1$; we assume that 0 < MPC < 1
Autonomous expenditure
The portion of planned aggregate expenditure that is independent of output
Induced expenditure
The portion of planned aggregate expenditure that depends of output Y
Expenditure line
A line showing the relationship between planned aggregate expenditure and output
Short-Run Equilibrium Output
The level of output at which output Y equals planned aggregate expenditure PAE; short run equilibrium output is the level of output that prevails during the period in which prices are predetermined
Income-expenditure multiplier
The effect of a one-unit increase in autonomous expenditure on short-run equilibrium output; i.e.- a multiplier of 5 means that a 10-unit decrease in autonomous expenditure reduces short-run equilibrium out by 50 units
Stabilization policies
Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps
Expansionary policies
Government policy actions intended to increase planned spending and output
Contractionary policies
Government policy actions designed to reduce planned spending and output