GDP Flashcards
What is Aggregate Expenditure (AE)?
The sum of expenditures on all final goods and services at a given price level
Aggregate Demand (AD) = Aggregate Expenditure (AE) = Real GDP = Y
What is the formula for Aggregate Expenditure (AE)?
AE = C + I + G + (X – M)
Where C = Consumption, I = Investment, G = Government spending, X = Exports, M = Imports
What does Consumption (C) refer to in the context of Aggregate Expenditure?
Spending by households on goods and services
What is Planned Investment (I)?
Planned spending by firms on capital goods and by households on new homes
Define Government Spending (G).
Spending by government on goods and services
What are Net Exports (X-M)?
Spending by foreign firms and households on locally produced goods and services minus spending by locals on goods and services produced in other countries
How does Disposable Income affect consumption expenditure?
Consumption spending changes when disposable income changes, indicated by the marginal propensity to consume (MPC)
What is Disposable Income (Y)?
Income earned by households after deducting taxes and adding transfers
What is the Consumption Function (C)?
C = a + mpc (Y)
Where ‘a’ is autonomous consumption and mpc is the marginal propensity to consume
What does the slope of the Consumption Function represent?
The marginal propensity to consume (MPC)
What is Autonomous Consumption (a)?
Consumption that is independent of disposable income
What is Non-Autonomous (Induced) Consumption?
Consumption that changes with disposable income
What does the Consumption Function Diagram illustrate?
It shows that the higher the income level, the higher one’s consumption expenditure
If a consumer’s autonomous consumption is $100 and their MPC is 0.6, what is the Consumption Function?
C = 100 + 0.6(Y)
What are the components of Aggregate Expenditure that are assumed to be autonomous of national income?
- Investment (I)
- Government Expenditure (G)
- Net Exports (X – M)
What does the Keynesian Cross diagram depict?
It shows the relationship between quantity produced and quantity sold at equilibrium
When does macroeconomic equilibrium occur?
When Aggregate Expenditure (AE) equals total production, or real GDP
What happens if AE is greater than real GDP (AE > Y)?
- Unplanned decrease in inventories
- Increasing production leading to an increase in real GDP
What happens if AE is less than real GDP (AE < Y)?
- Unplanned increase in inventories
- Decreasing production leading to a decrease in real GDP
What are Injections in the context of the circular flow?
- Investment
- Government Expenditure
- Exports
What are Leakages in the context of the circular flow?
- Savings
- Taxes
- Imports
What is the Marginal Propensity to Consume (MPC)?
The additional amount of consumption that results from a $1 increase in income
What is the Marginal Propensity to Save (MPS)?
The increase in savings that results from a dollar increase in income
What is the relationship between MPC and MPS?
MPC + MPS = 1
What is the Marginal Propensity to Import (MPM)?
The tendency to purchase foreign goods and services as income increases
What is the basic idea of the Multiplier?
An increase in investment increases aggregate expenditure and real GDP, leading to a larger increase in income
What is the formula for the multiplier in a closed economy?
K = 1 / MPS or K = 1 / (1 - MPC)
What is the formula for the multiplier in an open economy?
K = 1 / (MPS + MPM) or K = 1 / (1 - MPC + MPM)
How does an increase in autonomous spending affect GDP?
It leads to a larger increase in income
