Multiplier and money Flashcards
Income-dependent consumption
Dependent on income
Autonomous consumption
Consumer spending not dependent on income
C=a+bYd
C=current consumption
A=autonomous consumption
B=marginal propensity to consume
Yd=disposable income
Curing recession
Stimulate aggregate demand, govt should engage deficit spending, private investors
MPC (marginal propensity to consume)
Change in consumption/change in disposable income
MPS (marginal propensity to spend)
Change in S/ change in Yd
Multiplier process
- Let investment decline
- Leaves unsold output
- Production is cut back
- Income decreases
- Consumer spending decreases
- Go to step 2
Multiplier effect
Multiplier= change in real gdp/ change in autonomous expenditures
Functions of money
- Medium of exchange
- Unit of account
- Store of value
Store of value
Can be held for future purchases
Standard of value
Serves as a yardstick for measuring the prices of goods and services
MZM EQUATION
MZM=M2-small time deposits+money market mutual fund balances owned by business
M1
Currency outside banks, travelers checks, and check deposits
M2
Consists of M1 plus time deposits, savings deposits, and money market mutual funds
Types of checking accounts
NOW (negotiable order of withdrawal)- permits writing checks on sums deposited in interest-bearing savings accounts
ATS (automatic transfer savings)-transfer funds from interest-bearing savings account to non-interest bearing checking account when check is written
