Expenditure Mulitplier: The Keynesian Model Flashcards
What happens to prices and quantity sold in the very short term?
In the very short term, the price level is fixed, and aggregate demand determines the total quantity sold.
What model is used to understand Aggregate Demand (AD)?
To understand AD, we study the aggregate expenditure model.
What comprises Aggregate Planned Expenditure (AE)?
Aggregate planned expenditure (AE) is the sum of planned consumption (C), planned investment (I), planned government expenditures (G), planned exports (X), and planned imports (M) subtracted, which equals real GDP (Y).
How do consumption and imports relate to real GDP?
Consumption (C) and imports (M) depend on real GDP (Y), such that increases in Y increase AE, and increases in AE subsequently increase Y.
What primarily influences consumption and saving?
Consumption and saving depend primarily on disposable income (YD), which is real GDP minus taxes plus transfer payments.
What does the consumption function show?
The consumption function shows the relationship between disposable income (YD) and consumption (C)—an increase in YD leads to an increase in C.
What does the saving function show?
The saving function shows the relationship between disposable income and saving—an increase in YD leads to an increase in savings (S), with the sum of changes in consumption (ΔC) and savings (ΔS) equaling the change in disposable income (ΔYD).
What is the Marginal Propensity to Consume (MPC)?
The Marginal Propensity to Consume (MPC) is the fraction of an increase in disposable income that is consumed, calculated as ΔC/ΔYD, and it represents the slope of the consumption function
What is the Marginal Propensity to Save (MPS)?
MPS is the fraction of additional disposable income that is saved, represented as ΔS/ΔYD, and is the slope of the saving function.
How do the Marginal Propensity to Consume (MPC) and MPS relate to each other?
The MPC and MPS are complementary; added together they equal 1 (MPC + MPS = 1).
What factors can shift the consumption and saving functions aside from changes in disposable income?
Influences that can shift these functions include changes in expected future disposable income, changes in real interest rates, and changes in wealth.
How does an increase in expected future disposable income, a decrease in real interest rates, or an increase in wealth affect the saving and consumption functions?
An increase in expected future disposable income, a decrease in real interest rates, or an increase in wealth typically shifts the saving function downward and the consumption function upward.
What is the relationship between consumption, saving, and real GDP?
Consumption and saving are functions of real GDP, since an increase in real GDP leads to an increase in disposable income (YD).
What does the import function describe?
The import function relates the amount of imports to real GDP.
What is the Marginal Propensity to Import?
The Marginal Propensity to Import is the fraction of additional income (ΔY) that is spent on imports, calculated as ΔM/ΔY.