Chapter 11 Flashcards
Marginal propensity to consume (MPC)
The increase in consumer spending when disposable income rises by $1
∆ Consumer spending
∆ Disposable income
*usually between 0-1 because consumers dont spend all of an additional dollar
Marginal propensity to save (MPS)
The increase in household savings when disposable income raises by $1
1 -MPC
1 - ∆ consumer spending
∆ disposable income
Total increase in real GDP from a $100 billion rise in I
= 1
1- MPC X 100
Autonomous change in aggregate spending
An initial change in the desired level of spending by firms, households, or government at a given level of real GDP
∆Y = 1
1- MPC X100
Multiplier definition
The ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change
Multiplier formula
Multiplier = ∆Y = 1
∆AAS 1- MPC
automatic stabilizers
Taxes and some government programs act as automatic stabilizers, reducing the size of the multiplier
Consumption function definition
An equation showing how an individual household’s consumer spending varies with the household’s current disposable income
Consumption function equation
c = a + MPC x yd
Slow of consumption function
= rise over run
= ∆c/∆yd
= MPC
Aggregate consumption function definition
The relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending
Aggregate consumption function formula
C = A + MPC x YD
Permanent income hypothesis
Consumer spending ultimately depends mainly on the income people expect to have over the long term rather than on their current income
Life-cycle hypothesis
Consumers plan their spending over a lifetime, not just in response to their current disposable income
econometrics
the use of statistical techniques to fit economic models to empirical data
Principal factors of investment spending
interest rate
expected future level of real GDP
current level of production capacity
Planned investment spending
the investment spending businesses plan to undertake during a given period
Interest rates have biggest effect on what kind of investment spending?
residential construction
higher interest rate leads to
lower level of planned investment spending
Retained earnings
Past profits used to finance investment spending
The higher the current capacity
the lower the investment spending
investment spending slumps
periods of low investment spending
accelerator principle
A higher growth rate of real GDP leads to higher planned investment spending but a lower growth rate of GDP leads to lower planned investment spending
Inventories
Stocks of goods held to satisfy future sales
