Chapter 12 Flashcards
aggregated expenditure model
focuses on the start run relationship between total spending + real GDP, assuming a constant price level
aggregate expenditure (AE)
the sum of consumption, planned investment, government purchases, adn net exports, total spending in the economy
four components in this model are the same as
GDP
AE equation
AE = C + T + G + NX
AE model uses
planned investments rather than actual investment
the difference is that planned investment spending does not include the build up of
inventories
inventories
goods that have been produced but not yet sold
planned investment =
actual investment - unplanned changes in investment
unplanned change inventories =
actual investment - planned investment
equilibrium in the economy?
spending on output = value of output produced
AE = GDP
if aggregate expenditure is equal to GDP
then inventories remain unchanged and the economy is in macroeconomic equilibrium
if aggregate expenditure is less than GDP
then inventories rise, and GDP and employment decreas
if aggregate expenditure is greater than GDP
then inventories fall, and GDP and employment increase
if we are not at equilibrium the economy will
move towards equilibrium
with moving towards equilibrium GDP + employment
change as a result
if net exports were negative
imports > exports
what affects the level of consumption
current disposable income, household wealth, expected future income, the price level, interest rate
disposable income
YD= personal income - personal income taxes + transfer payments
wealth does not equal
income
household wealth is
assets (homes, stocks, bonds) and liabilities (mortgage, student loans)
most people prefer to keep their consumption fairly stable from year to year, a process known as
consumption smoothing
how strong is the relationship between income and consumption?
Very strong, described best through consumption function as households spend a consistent fraction of each extra dollar of YD and C
Marginal Propensity to consume (MPC)
the amount by which consumption spending changes when disposable income changes
-is the slope of the consumption function
MPC=
change in consumption / change in disposable income
disposable income is
income - taxes
disposable income =
national income - net taxes
we assume that national income and GDP are
equal
national income =
disposable income + net taxes
this equation just shows that if we assume that net taxes do not change as national income changes, we have the result that
any change in YD will be the same as change in national income
national income =
consumption + savings + taxes
Y =
net taxes does not change
change in Y = change in consumption and change in savings
marginal propensity to save
1 = MPC + MPS
intuition:
you get an extra dollar
you spend part of it (MPC)
you save part of it (MPS)
what affects the level of investment?
expectations of future profitability, interest rate, taxes, cash flow
firms will build more if
optimistic about future profitability
there is an ___ relationship between interest rate and investment spending
inverse
what 2 ways does higher corporate income taxes on profits reduce investment
- decrease money available for reinvestment
- diminishing expected profitability of investment
cash flow
the difference between the cash revenues received by a firm and the cash spending by the firm
what is the largest contributor to cash flow
profit
in recessions, profits fall for most, decreasing ability to
financial investments
transfer payments are not included in
government purchases
the value of net exports is affected by
price level in US vs the price level in other countries, us growth rate vs growth rate in other countries, us dollar exchange rate
NX has been negative the last few decades which means
we import more than we export
if us price level rises faster than foreign price levels, net exports will ____ , why?
decrease
us goods become more expensive relative to foreign goods. our imports rise and exports fall
if us price level rises slower than foreign price levels, net exports will ____ , why?
increase
us goods become cheaper relative to foreign goods. our imports fall and exports rise
us GDP grows faster than foreign GDP, net exports will __ , why?
decrease
we’re growing faster so US demand for imports rises faster than foreign demand for our exports
us GDP grows slower than foreign GDP, net exports will __ , why?
increase
we’re growing slower so US demand for imports rises slower than foreign demand for our exports
us dollar rises in value relative to other currencies, net exports will ___ , why?
decrease
one dollar buys more now! imports are cheaper. but it is more expensive for other currencies to buy our dollars, so our exports are more expensive
so imports rise and exports fall
us dollar falls in value relative to other currencies, net exports will ___ , why?
increase
one dollar buys less now! imports are more expensive. but it is cheaper for other currencies to buy our dollars, so our exports are more cheaper
so imports fall and exports rise
