Macroecon chapter 6 Flashcards
No government leads to
No international trade
Difference between actual and desired expenditure
Actual: What’s purchased
Desired: What we would like to purchase
Desired aggregate expenditure formula
AE = C + I + G + (X - iM)
Disposable income formula
Yd = Household income(Y) - Taxes(T)
Taxe formula
T = taxe rate(t) x Y
Saving formula
S = Yd - C
C is dependent of which factor? (4)
- Yi (income)
- W (wealth)
- i (interest rate)
- F (Expectation about future)
Impact of income on C
Positive
Impact of wealth on C
Positive
Impact of interest rate on C
Negative
Impact of future expectation on C
Positive
If S < 0…
C > Yd
If S > 0…
C < Yd
Average propensity to consume formula
APC = (C/Yd)
Component of AE (2)
- Autonomous
- Induced
Autonomous components (4)
- Consumers
- Interest
- Government spending
- Export
Induced component (2)
- cY
- marginal propensity to import (mY)
Average propensity to spend formula
APS = (S/Yd)
Marginal propensity to consume formula
MPC = (ΔC/ΔYd)
Marginal propensity to spend formula
MPS = (ΔS/ΔYd)
APC and APS relation
APC + APS = 1`
MPC and MPS relation
MPC + MPS = 1
Difference between average and marginal propensity to consume
MPC is constant
APC is not constant
mY influence on C
Positive
mY influence on S
Negative
What is the most volatile component of GDP
Investment
Why is Investment such a volatile component of GDP
Associated my aggregate economic fluctuation
Investment is a function of… (3)
- Real interest rate (r)
- Level of sales
- Business confidence
Impact of sales on investment
Positive
Impact of business confidence on invesment
Positive
Why is a I graph on the horizontal line?
I is independent of Y
AE formula in the absence of govnt and int. trade
AE = C + I
Slope of AE in simple economy
MPC
Vertical intercept of AE graph
A0 = C0 + I0
Where is the equilibrium on a graph
Point that intercepts the AE curve and the 45° line
Equilibrium
Actual expenditure is equal to desired expenditure
Equilibrium formula
Y = (C0 + I0) / (1 - mpc)
If Y < Y0
Output will rise
Inventory fall
If Y > Y0
Output will fall
Inventory rise
Shifts in AE function (2)
- Parallel shift
- Change in slope
Simple multiplier formula
1 / (1 - z)
What happens if any item of A0 change
AE curve will shift parallel up or down (they are positively related)
What happens of z change (change in mpc)
AE curve will pivot up or down (they are positively related)
What does a large simple multiplier do in a graph
Creates a steeper AE function
Factor influencing the multiplier (2)
- MPC
- Expectation about self-fulfilling prophecy
