Chapter 8 Flashcards
Aggregate demand (AD)
total demand for all goods and services in the economy
Consumption
almost 60% of economic activity, determined by disposable income and real interest rates.
Average Propensity to consume (APC):
Fraction of disposable income used for consumption
Marginal propensity to consume (MPC)
Additional consumption resulting from change in disposable income.
Investment (I)
Approx. 20% of GDP, highly unstable, and subject to economic, social and political variables.
Government purchases
Approx. 25% of total spending Purchases by government of new goods and services produced.
Includes healthcare, education, highways, and police.
trade surplus
(exports > imports) positive net exports, increases aggregate demand
trade deficit
(exports < imports) negative net exports, decreases aggregate demand
Investment demand (ID) curve
the dollar amount of investment at real interest rates.
- Downward sloping
- Reflects how investment varies inversely with interest rate.
Private saving
amount of income left over after consumption and taxes.
Public saving
amount of income the government has left over after paying for spending.
National saving
saving from the public & private sectors.
Earnings expectation
Lower expected earnings lead to more saving now, at at any given interest rate.
Budget Surplus
(T > G), Government receives more tax than it spends
- Public saving increases, National saving increases, shifting SS right.
- Leads to increase of real interest rate, and increase in EQ saving and investment.
Budget deficit
(G > T), Government spends more than it receives in tax
- Public saving decreases
- National saving decreases, shifting SS left
