Chapter 11 Flashcards
list
model assumptions
- produceres are willing to supply additional output at a fixed price
- interest rate is fixed
- no gov spending, no taxes
- closed economy
define
Disposable Income
Y - (T - TR)
no gov: y
t - tr is net tax payment
what is The Multiplier
1 / (1 - MPC)
describe
multiplier effect (chowdhury)
new investment in the economy causes spending > production. Firms will increase their output by the amount demanded. this will be added to the GDP
Y + Δ Y = C + I + Δ I
define
multiplier effect (thomas)
if GDP increases by some amount, then GDP is going to rise by more than that amount
formula for GDP and disposable income
Δ I + MPC x Δ I + MPC(MPC x ΔI) + MPC (MPC^2 x Δ I)…
or
1/(1 - MPC) x ΔGDP
define
Marginal Propensity to Consume
increase in consumer spending when disposablle income increases by one dollar
Formula for Marginal Propensity to Consume
Δ consumer spending / Δ disposable income
disposable income formula
consumption expenditure + savings
define
MPS
proportion of each additional $ saved
MPS formula
1 - MPC
The greater the savings…
hint: size of MPC
the larger the MPC
define
Consumption Function
an estimation of consumer spending
define
Consumption Function Formula
C = α + MPC x Yd
discuss
Keynesian Cross
- 45 degree line, X = Y
- above the line, Y > X
- below the line, X > Y
If Y > X…
keynesian cross
spending > income
if X > Y…
keynesian cross
savings > spending
define
C
consumption function
consumer spending
define
α
consumption spending
autonomous consumer spending
what amount will we always spend, even with 0 income
define
MPC
consumption function
marginal propensity to consume
slope
Δc/Δyd
define
Yd
consumption function
disposable income
how to get aggregate consumption function from individuals?
- add together the intercept value (α)
- average MPC
discuss
Income - Expenditure Model
- same assumptions as usual
- used to find AEplanned
- Yd = AEplanned is eqm
AEplanned = ?
AEplanned = C + Iplanned
(or when it crosses the 45 degree line)
if AE > 45 degree line….
Iunplanned is negative, GDP increases
if AE < 45 degree line…
Iunplanned is positive, producers cut production to movve back down to the eqm
eqm (help(
GDP = AEplanned + Iunplanned
i unplanned will = 0
if GDP > AEplanned…
Iplanned > 0
-> producers will cut/slow production to move back to the eqm
if GDP < AEplanned…
Iplanned < 0
-> producers will raise production to move back to the eqm
define
Autonomous Change in Aggregate Expenditure
an initial rise or fall in aggregate expenditure at a given lvl of real gdp
list
Shifts in Aggregate Consumption Function
changes in expected future disposable income
- increase, function shifts up
- dec, function shifts down
changes in aggregate wealth
- increase, function up
- decrease, function down
define
Planned Investment Spending
investment spending that firms intend to undertake during a given period
list
Factors that Impact Investment Spending
- interest rate
- expected future lvl of real GDP
- current lvl of production capacity
discuss
Interest rate
investment spending
negatively related - high interest leads to low I
discuss
Expected Future Real GDP
investment spending
- higher expected growth: higher lvl of planned investment
- lower expected growth: lower planned investment
(known as the accelerator principal)
discuss
Inventories
investment spedning
Inventory Investment: value of the change in total inventories held in the economy during a given period
Unplanned Inventory Investment: unintended swing in inventories due to sales
Actual investment spending =
Iunplanned + Iplanned
Y*
income-expenditure equilibrium GDP
Change in Y* arising from an autonomous change in expenditure =
(1/1 - MPC) x ΔAE0
