Income-Expenditure Analysis and the Multiplier Flashcards
Calculations for aggregate expenditure
Consumption (C) + Investment (I) + Government Expenditures (G) + Net Exports (NX)
In the Keynesian Cross Model detail what is meant when AE is equal to greater than or less than the real GDP.
When AE=Y planned spending equals output and output will remain constant.
When AE> Y there is excess demand in the economy and output will rise.
When AE< Y there is insufficient spending in the economy and output will fall.
What is the Keynesian Cross model measuring?
Desired aggregate expenditure= actual national income (output)
Relation between desired aggregate expenditure and real GDP
What’s the equation for disposable income?
Consumption + Savings
Eqn: Marginal propensity to consume (MPC)
Change in consumption/ change in disposable income
Eqn: Marginal propensity to save (MPS)
Change in savings/ change in disposable income
Eqn: Average propensity to consume
consumption/ disposable income
Eqn: Average propensity to save
savings/ disposable income
Induced consumption
Consumption depending on disposable income
Autonomous consumption (a)
Minimal consumption regardless of disposable income
Whats the eqn for consumption?
Autonomous consumption (a) + (MPC x Yd)
Variables that alter autonomous consumption
Wealth
Interest rate
Expectations about the future
Determinants of desired investment
Real interest rate
Changes in sales
Expectations about the future
Eqn: Investment expenditure
AE= C+ I
AE= (a+ MPC *Yd) + I
Eqn: Taxes (T)
T= tax rate (t) * national Income (Y)
What is budget deficit, balance and surplus?
Budget deficit is when tax revenue is less than government spending.
Budget balance is when tax revenue is the same as government spending.
Budget surplus is when tax revenue is greater than government spending.
AE Eqn with all variables
Consumption (C) + Investment (I) + Government expenditure (G)= (a+ MPC * Yd) + I + G + (X-IM)
Yd= Y-T
Income-Taxes
Determinants of net exports:
GDP
Foreign income
Relative international prices
Exchange rate
Eqn: Multiplier
1/(1-AEslope)
What is the idea behind the multiplier
When income rises it is multiplied by a certain amount to get the output.
What are considered leakages in an economy?
Taxes, savings and spending on imports