Chapter 9 Flashcards
different between aggregate demand curves and individual market curves?
these curves apply to the whole economy, rather than just to a single market
, the aggregate demand and aggregate supply model is very different from the microeconomic model of demand and supply in individual markets
why is aggregate demand curve downward sloping?
a fall in the price level increases the quantity of real GDP demanded.
Aggregate expenditure model
§A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant.
Aggregate expenditure (AE):
§The total amount of spending in the economy—the sum of consumption, planned investment, government purchases and net exports.
aggregate expenditure components
AE = C + I + G + NX
PLANNED investment
Macroeconomic equilibrium
Aggregate expenditure = GDP
If
Aggregate expenditure is equal to GDP then
total amount of expenditure = total amount of productoin
inventories are unchanged the economy is in macroeconomic equilibrium.
if
Aggregate expenditure is less than GDP
total amount of spending in the economy is less than the total amount of production
inventories rise
GDP and employment decrease.
Aggregate expenditure is greater than GDP
the total amount of spending in the economy is greater than the total amount of production
inventories fall
GDP and employment increase.
The five most important variables that determine the level of consumption are:
§Current disposable income
§ Household wealth
§ Expected future income
§ The price level
§ The interest rate
Consumption function:
§The relationship between consumption and disposable income.
Marginal propensity to consume (MPC):
§The slope of the consumption function—the change in consumption divided by the change in disposable income.
MPC

show consumption function

relationship between consumption and national income
§Disposable income = national income – net taxes
OR
§National income = GDP = disposable income + net taxes
little difference between national income and GDP
National income =
§consumption + saving + net taxes.
Change in national income
§change in consumption + change in saving + change in net taxes.
To simplify, we can assume that net taxes are always a constant amount, in which case the change in net taxes equals zero so that
change in Y = Change in C + change in S
Marginal propensity to save (MPS):
1 = MPC + MPS
The four most important variables that determine the level of planned investment are:
§Expectations of future profitability
§The interest rate
§Taxes
§Cash flow
government purchases does not include
transfer payments
The three most important variables that determine the level of net exports are:
§The price level in Australia relative to the price levels in other countries.
§The economic growth rate in Australia relative to the economic growth rates in other countries.
§The exchange rate: value of one currency in terms of another
When
a)Real interest rates increase.
how will this impact Aggregate expenditure?
consumers
more expensive to finance borrowing
consumers will save b/c they usually borrow to purchase consumer durables e.g. cars
- opportunity cost of spending increases as return to savings increase
When
a)Real interest rates increase.
how will this impact Aggregate expenditure?
firms
more expensive to finance borrowing
typically finance most of their investment through borrowing, hence an increase in the real interest rate will result in a decrease in investment spending























