ECON CH 8 Flashcards
aggregate output (Y)
is the total quantity of goods and services produced (or supplied) in an economy in a given period
aggregate income (Y)
is the total income earned by all factors of production in a given period
closed economy without government
Y=AE=C+I
aggregate output=aggregate input
household consumption
is the amount of spending by households on goods and services produced in our economy
consumers spending behavior is determined by (3)
- household income and wealth
- interest rates
- households expectations about the future
keynes believed that household consumption is directly related to
its income
aggregate consumption function
is the pos relationship between aggregate income (Y) and aggregate consumption ©
marginal propensity to consume (MPC)
the fraction by which consumption increases when income increases, on average by a dollar
the slope of the consumption function = change in consumption divided by change in aggregate income is
MPC
aggregate consumption function
C=100+.75Y
change in inventory cannot be planned by who
firms; it is determined by how much households decide to buy
planned investment is
fixed; I=25, it does not change when income changes
planned aggregate expenditure (AE)
is the total amount the economy plans to spend AE=C+I
equilibrium
Y=AE
aggregate expenditure=aggregate income
what would happen to output (Y) when AE changes (increases)?
output changes by more than AE does
multiplier
is the ratio that determines by how much the equilibrium level of Y will change in response to a change in AE
investment multiplier
is the change in output resulted from a change in investment
the size of the multiplier depends on
MPC (the slope of the AE line)
multiplier equation
1/1-MPC
the size of the multiplier in the US economy is about
1.4
business firms make decisions based on
inventory change
the economy adjusts towards equilibrium in response to
firms` production adjustments (change in inventory helps the economy stay in equilibrium)
production equation=
total sales+ change in inventory
Y= AE+change in inv
change in inventory equation=
Y-AE
if change in inventory is less than 0
then firms increase production
if change in inventory is greater than 0
then firms reduce production
if change in inventory=0
then firms keep producing the same
