Unit 5 Flashcards
What are sticke wages
minimum wage laws and labor contracts prevent them from dropping significantly.
Idea of consumption & production
If our economy produces more goods, more income is sent to people or households. If your economy produces fewer goods, less income is sent to people or households. If you make more, you spend more, but also save more because you can.
What does investment do
Make the economy grow (ripple effect)
WHat is the consumption function
measures what percent of your income you spend. Make $100, spend $80, CF = 80% or .8
What does MPC stand for
Marginal propensity to consume
What does MPC measure
what percent of a change in income you will spend. So if we give you a raise of $20 and you only spend $10 of it because you want to save more, your MPC would only be 50% (shows what will actually end up in the product market)
What are leaks
Savings(not being spent), taxes(not being spent) and imports. leaks occur when money is no longer circulating around the Circular Flow Model.
What are injections
Investment, government spending, and exports.
What happens If injections are bigger than leaks
the economy speeds up
What happens if leaks are bigger than injections,
the economy slows down.
what do we use the multiplier formula for
to figure out HOW FAR aggregate demand will actually shift (based on MPC)
What is the multiplier formula?
Change in Y = Multiplier x Change in G, I, Xn or T
What is the Simple Spending Multiplier used for
Government Spending(fiscal), Investment(monetary) or Net Exports. All money that is directly spent in the product market.
What is the Simple Spending Multiplier
y= 1/MPS
What is the tax multiplier formula
Tax multiplier = MPC/MPS
