Chapter 12 Flashcards
With respect to the economy as a whole, what is real disposable income?
Real GDP minus net taxes, or after-tax real income.
What is the definition of consumption good?
Goods purchased by households to use up such as food and movies.
What is the difference between saving and savings from an economics perspective?
Saving is a rate, savings is a value at a particular time.
What is the definition of investment from an economist’s perspective?
Investment primarily is defined to include expenditures on new machines and buildings– capital goods–that are expected to yield a future stream of income.
What is a capital good?
Non-consumable goods that firms use to make other consumables or products.
What is the difference between fixed investment and inventory investment?
Fixed investment involves the purchasing of capital goods while inventory investment includes purchases of goods to stock inventories of firms.
According to the classical model, what was the key determinant of saving?
The interest rate.
Extra Notes: Specifically, the higher the interest the more people wanted to save and consequently, the less people wanted to consume.
According to Keynes what is the most important determinant of an individual’s real saving and consumption decisions?
The flow of income.
Briefly describe the lifecycle theory of consumption.
A theory in which a person bases decisions about current consumption and saving on both current income and anticipated future income.
Under the lifecycle theory of consumption, if an individual is slated to receive more income what will be their predicted actions in terms of saving and consumption?
Save less, consume more.
Extra Notes: If a person expects a higher income the individual will tend to consume more and save less in the same span of time.
What is the permanent income hypothesis?
A theory of consumption in which an individual determines current consumption based on anticipated average lifetime income.
According to the permanent income hypothesis, if a person’s income temporarily changes what will be their predicted actions?
The person responds by saving the extra income and leaving their consumption unchanged.
What is the consumption function?
The relationship between the amount consumed and disposable income.
Note: a consumption function tells us how much people plan to consume at various levels of disposable income.
What is “Dissaving?”
A situation in which spending exceeds income.
Mathematically the saving function is the ____ of the consumption function.
Compliment
What is the difference between actual disposable income and the planned rate of consumption per year?
The planned rate of saving per year.
What is autonomous consumption?
The part of consumption that is independent of the level of disposable income (RGDP).
Extra Notes: This is the y-intercept on a RGDP vs Consumption graph. This represents the stuff you have to buy irrespective of your income (food, water, electricity, etc)
True or False
Changes in autonomous consumption shift the Y-intercept of the consumption function.
True.
In economic analysis, the term autonomous means what?
Existing independently
What is the formula for the average propensity to consume or APC?
Real consumption divided by real disposable income.
What is the average propensity to save formula?
Real saving divided by real disposable income.
What is the formula for the marginal propensity to consume?
Change in real consumption divided by change in real disposable income.
What is the formula for the marginal propensity to save?
Change in real saving divided by change in real disposable income.
True or false, the MPC cannot be less than zero or greater than one.
True.
What is the definition of net wealth?
The entire stock of assets owned by person, household, firm, or country minus any debts owed.
If a person’s net wealth increases, what will happen to their consumption function?
It will shift upward.
If the interest rate is lower, the opportunity cost of an investment will be _____.
Lower.
True or False
As the interest rate falls, more investment opportunities will be profitable, and planned investment will be higher.
True
Mathematically describe the relationship between the investment function and the rate of interest.
The investment function is represented as an inverse relationship between the rate of interest and the value of planned real investment.
True or False
Any change in productive technology will have no effect on the investment function.
False, any change in productive technology can potentially shift the investment function.
A positive change in productive technology would stimulate demand for additional capital goods and shift the investment curve to the _____.
Right
What is a lump-sum tax?
A tax that does not depend on income.
What is the “multiplier?”
The ratio of the change in the equilibrium level of real GDP to the change in autonomous real expenditures.
What is the formula for the multiplier in terms of the MPS and MPC?
M = 1/(1-MPC) = 1/MPS
