Econ 144- Chapter 23 – Flashcards
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Aggregate Expenditure
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Total spending in the economy: the sum of consumption, planned investment, government purchases, and net exports
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Key idea of the aggregate expenditure model is:
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In any particular year, the level of GDP is determined mainly by the level of aggregate expenditure
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4 Components of Aggregate Expenditure:
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Consumption, Net Exports, Government Purchases, and Planned Investment
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Inventories
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Goods that have been produced but not yet sold
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Actual Investment equals Planned Investment only when:
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there is no unplanned change in inventories
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When aggregate expenditure is greater than real GDP:
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Inventories will decline, and GDP and total employment will increase
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When aggregate expenditure is less than real GDP:
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Inventories will increase, and GDP and total employment will decrease
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When aggregate expenditure is equal to real GDP:
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Inventories are unchanged, and the economy is in macroeconomic equilibrium
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The five most important variables that determine the level of consumption:
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1. Current disposable income (most important)
2. Household wealth
3. Expected future income
4. The price level
5. The interest rate
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Consumption Function
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The relationship between consumption spending and disposable income
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Marginal Propensity to Consume (MPC)
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The slope of the consumption function: the amount by which consumption spending changes when disposable income changes
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Marginal Propensity to save (MPS)
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The amount by which saving changes when disposable income changes
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The four most important variables that determine that level of investment are:
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1. Expectations from future profitability
2. The interest rate
3. Taxes
4. Cash Flow
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A higher real interest rate results in:
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Less investment spending
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A lower real interest rate results in:
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More investment spending
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Cash flow
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The difference between the cash revenues received by a firm and the cash spending by the firm
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The three most important variables that determine the level of net exports:
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1. The price level in the United States relative to the price levels in other countries
2. The growth rate of GDP in the United States relative to the growth rates of GDP in other countries
3. The exchange rate between the dollar and other currencies
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Autonomous Expenditure
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An expenditure that does not depend on the level of GDP
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Multiplier
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The increase in equilibrium real GDP divided by the increase in autonomous expenditure
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Multiplier Effect
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The process by which an increase in autonomous expenditure leads to a larger increase in real GDP
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Aggregate Demand Curve
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A curve that shows the relationship between the price level and the level of planned aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure
