Chapter 11 Flashcards
In the Keynesian what can we say about the prices of inventories and the quantity of inventories sold?
Prices are fixed
Quantity sold depends on demand
Because each firm’s prices are fixed, what can we say about the economy as a whole?
The price level is fixed
Aggregate demand determines RGDP
What is aggregate planned expenditure?
The sum of planned:
1. Consumption expenditure
2. Investment expenditure
3. Government expenditure
4. Exports
minus planned:
1. Imports
What 2 components of planned expenditure change when RGDP changes?
- Consumption expenditure
- Imports
Disposable Income Formula
YD = Y - T
Disposable Income = Aggregate Income - Net Taxes
Disposable Income Allocation Formula
YD = C + S
Disposable Income = Consumption + Savings
Marginal Propensity to Consume Formula
MPC = ΔC/ΔYD
Marginal Propensity to Save Formula
MPS = ΔS/ΔYD
MPC + MPS = ?
1
What is the consumption function?
The relationship between consumption expenditure and disposable income
Marginal Propensity to Import Formula
MPI = ΔI/ΔRGDP
What is induced expenditure?
Consumption Expenditure - Imports
What is autonomous expenditure?
Investment + Government + Exports
Dissaving happens on the consumption function when?
The consumption function is over 45° line
Saving happens on the consumption function when?
The consumption function is under 45° line
Why can aggregate planned expenditure differ from actual aggregate expenditure?
because firms can have unplanned
changes in inventories
What is equilibrium expenditure?
the level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP
Describe inventories when:
aggregate planned expenditure exceeds real GDP (the AE curve is above the 45° line)
Firms have an unplanned decrease in inventories
What happens when firms have an unplanned decrease in inventories?
Firms hire workers and increase production
Real GDP increases
Describe inventories when:
aggregate planned expenditure is less than real GDP (the AE curve is below the 45° line)
Firms have an unplanned increase in inventories
What happens when firms have an unplanned increase in inventories?
Firms fire workers and decrease production
Real GDP decreases
What is the multiplier?
the amount by which a change in autonomous expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP
Why does an increase in autonomous expenditure have a multiplier?
Autonomous expenditure ↑ - Real GDP ↑ - Induced expenditure ↑ - Aggregate expenditure ↑ - Real GDP ↑ …
What is the size of the multiplier?
1/(1- Slope of AE Curve)
How does a change in autonomous expenditure shift the AE curve?
AE curve shifts up
How does a decrease in the price level change the AE curve?
Price ↓ - AE ↑
