Chapter 6 - Sum And KC Flashcards
What is Desired Aggregate Expenditure (AE)?
Desired aggregate expenditure is the amount that economic agents want to spend on purchasing domestic output. It is equal to the sum of desired consumption, desired investment, desired government purchases, and desired net exports.
Example sentence: In a closed economy, desired aggregate expenditure is expressed as: AE = C + I + G + NX
What is the Consumption Function?
The relationship between disposable income and desired consumption is called the consumption function. It consists of autonomous expenditure (constant term) and induced expenditure (the part of consumption that responds to income).
Additional information: The consumption function is typically represented as: C = a + bY, where ‘a’ is autonomous consumption and ‘b’ is the marginal propensity to consume.
What are Marginal Propensities to Consume and Save (MPC and MPS)?
MPC measures the responsiveness of desired consumption to changes in disposable income. MPS measures the responsiveness of desired saving. Both are positive and sum to 1, indicating all disposable income is either consumed or saved.
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What Causes Shifts in the Consumption Function?
Changes in wealth, interest rates, or expectations about the future can lead to changes in autonomous consumption, causing the consumption function to shift.
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What Factors Influence Firms’ Desired Investment?
Firms’ desired investment depends on real interest rates, changes in sales, and business confidence. In the simplest economic model, investment is treated as autonomous with respect to changes in national income.
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What is Equilibrium National Income?
Equilibrium national income is the level of national income at which desired aggregate expenditure equals actual national income.
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What Happens When Income is Above or Below Equilibrium?
When income is above equilibrium, desired expenditure is less than national income, leading to inventory accumulation and eventual reduction in output. When income is below equilibrium, desired expenditure exceeds national income, leading to inventory depletion and eventual increase in output.
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How is Equilibrium National Income Represented Graphically?
Equilibrium national income is represented by the point at which the aggregate expenditure (AE) curve cuts the 45° line, indicating where desired aggregate expenditure equals actual national income.
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What Increases Equilibrium National Income?
Equilibrium national income increases with a rise in either autonomous consumption or autonomous investment expenditure.
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What is the Multiplier Effect?
The multiplier effect measures the magnitude of the effect on national income of shifts in autonomous expenditure. It is defined as the change in national income divided by the change in autonomous expenditure.
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What is the Simple Multiplier?
The simple multiplier is the multiplier when the price level is constant. It is calculated as 1 / (1 - z), where z is the marginal propensity to spend out of national income. The larger z is, the larger the simple multiplier.
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How Do Expectations Affect National Income?
Expectations play an important role in determining national income. Optimism can lead to increased desired expenditure and higher national income through the multiplier process, while pessimism can lead to decreased expenditure and lower national income.
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What is the Difference Between Desired and Actual Expenditure?
Desired expenditure is the amount economic agents plan to spend, while actual expenditure is the amount actually spent on goods and services.
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What are Average and Marginal Propensities to Consume?
The average propensity to consume (APC) is the fraction of total disposable income that is consumed, while the marginal propensity to consume (MPC) is the fraction of additional disposable income that is consumed.
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What are Average and Marginal Propensities to Save?
The average propensity to save (APS) is the fraction of total disposable income that is saved, while the marginal propensity to save (MPS) is the fraction of additional disposable income that is saved.
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