Module 16

Question 1

marginal propensity to consume

Answer 1

the increase in consumer spending when disposable income inc by $1
=∆consumer spending /∆disposable income

Question 2

marginal propensity to save

Answer 2

increase in saving when disposable income inc by $1

=1-MPC

Question 3

autonomous change in aggregate spending = ∆AAS

Answer 3

an initial rise or fall in aggregate spending that is the cause, not the result, of a series of income and spending changes

Question 4

multiplier

Answer 4

∆Y = ∆AAS / MPS

Question 5

disposable income

Answer 5

income after taxes

Question 6

consumption function

Answer 6

C = a + MPC(Yd)
a = amount spent if u had no disposable Y
Yd = disposable income

Question 7

Aggregate consumption function

Answer 7

C = A + MPCYd
C = aggregat consumer spending
A = aggregate autonomous consumer spending
Yd = aggregate disposable income

Question 8

autonomous consumer spending

Answer 8

amount a household would spend if it had no disposable income

Question 9

permanent income hypothesis

Answer 9

spending reflects expected future disposable income rather than current Yd

Question 10

life cycle hypothesis

Answer 10

people plan their spending over their lifetime, not just in reponce to current Yd
ex: people save more during peak years of earning
initially wealthy people save less

Question 11

planned investment spending

Answer 11

investment spending businesses intend to undertake during a given period, depending of interest rate, expected future rGDP, and current level of production capacity

Question 12

retained earnings

Answer 12

past profits used to finance investment spending

***opportunity cost same when using retained earnings or borrowed funds

Question 13

inventory

Answer 13

stocks of goods held to satisfy future sales

Question 14

inventory investment

Answer 14

value of the change in total inventories held in the economy during a given period, can be negative

Question 15

sign of unplanned inventory investment

Answer 15

(+) when unforeseen dec in sales –> higher inventory

(-) when unforeseen inc in sales –> smaller inventory

Question 16

actual investment spending

Answer 16

= planned + unplanned