week 2 Flashcards
what is aggregate output?
total quantity of goods and services produced in an economy in a given period. Eg real output
what is aggregate income
total income received by all factors of production in a given period
what is the main factor of consumption?
depends on someone’s personal disposable income ( the income the household receives minus direct taxes)
The more you earn the more disposable income you have.
what is investment expenditure? ( defintion)
Investment refers to the purchase by firms of physical capital (buildings and equipment) and additions to inventories
what is aggregate outcome equal to?
aggregate income as Recall from the circular flow of income that there is an exact equality between aggregate
output and aggregate income
how do households allocate their income?
in consumption and saving
what is aggregate expenditure is equal to when drawing it as a graph
consumption plus investment
when does equilibrium output occur?
aggregate expenditure = actual aggregate output
but only holds if planned investment and actual investment is the same
what’s the difference between actual investment and planned investment
Desired or planned investment refers to the additions to capital stock and inventory that are planned by firms
Actual investment is the actual amount of investment that takes place
It includes items such as unplanned changes in inventories
what happens when actual output is greater than aggregate expenditure?
Firms are producing more than is being
demanded by households and firms
▶ Unplanned rise in inventory
▶ Unplanned investment is positive
▶ Output falls
what happens when actual output is less than aggregate expenditure?
▶ Firms are producing less than is being
demanded by households and firms
▶ Unplanned fall in inventory
▶ Unplanned investment is negative
▶ Output rises
in a closed economy ( circular flow income) what does aggregate expenditure depend on
the marginal propensity to consume
what does MPC tell us ?
tells us how much aggregate consumption expenditure changes when income changes
what is autonomous expenditure?
An autonomous expenditure refers to necessary expenditure.
what can shift autonomous expenditure?
Changes in autonomous spending result in shifts of the AE schedule
additionally positive or negative expectations will alter firms output
consumer confidence on the future of the economy also determines AE
what is the multiplier effect
when autonomous expenditure changes the aggregate expenditure shifts when this happens the output changes by more than the initial change is autonomous spending
this increases national income and thus household income so consumption will increase
what does the size of the multiplier effect depend on
the marginal propensity to consume
