Chapter 6: The Simplest Short-Run Macro Model Flashcards
What is the formula for the aggregate expenditure (AE) function in a simple macro model?
AE = A + zY, where A is autonomous expenditure and z is the marginal propensity to spend.
What is the condition for equilibrium national income in the AE model?
Equilibrium occurs when AE = Y (aggregate expenditure equals national income).
What does autonomous expenditure include in the simple model?
Autonomous consumption and investment—expenditures that don’t depend on income.
What is the marginal propensity to consume (MPC)?
MPC = ΔC / ΔY; the fraction of additional income spent on consumption.
What is the marginal propensity to save (MPS)?
MPS = ΔS / ΔY; the fraction of additional income that is saved.
What is the simple multiplier formula?
Multiplier = 1 / (1 - z), where z is the marginal propensity to spend.
How do you calculate the change in income from a change in autonomous spending?
ΔY = Multiplier × ΔA
What causes the AE curve to shift upward?
Increases in wealth, consumer/business optimism, or lower interest rates
What happens when AE > Y?
There’s excess demand → inventory depletion → firms increase output → Y rises.
What happens when AE < Y?
There’s excess supply → inventory buildup → firms cut production → Y falls.
What is the difference between autonomous and induced expenditure?
Autonomous: independent of income.
Induced: varies directly with changes in income.
What does a steeper AE curve imply about the multiplier?
A steeper AE curve (higher z) means a larger multiplier.
What’s the consumption function formula?
C = a + bY, where a = autonomous consumption and b = MPC
What effect do expectations have on equilibrium income?
Optimism raises desired spending (shifts AE up), increasing income; pessimism lowers it.
What does it mean when MPC + MPS = 1?
All disposable income is either spent (MPC) or saved (MPS).
