Macroeconomics: The Multiplier – Flashcards
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Classical economists
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Believe that leakages always equal injections; use flexible interest rates as the mechanism to ensure this
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Aggregate expenditures (AD)
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Four components; consumption expenditure, investment, government expenditure, net exports
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Recession
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Can be induced by a decline in the willingness and ability of consumers to spend their income
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Autonomous consumption
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Consumer spending not dependent on current income
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Income-dependent consumption
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Consumer spending that increases as income increases, and vice versa
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Consumption function
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Current consumption = autonomous consumption + [marginal propensity to consume X disposable income]
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Macroequilibrium
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leakages must equal injections; output supplied equals output demanded
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Classical economists
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assume that leakages equal injections, using flexible interest rates as the mechanism to ensure this; rising input of goods results in a falling of price
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Keynes' response to self adjustment
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rather than adjusting back toward full employment, Keynes saw the economy becoming more unstable as businesses react to declining sales, falling prices, and lowered expectations of the future
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disposable income
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equals aggregate income minus taxes + transfer payments
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Consumption function
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allows us to predict how much the consumption component of AD will change when incomes change
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Dissavibg
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occurs when consumers use up savings t obuy things
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Cure recession
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by simulating aggregate demand either by encouraging more private investment or consumer purchases or by using government purchases to bolster aggregate demand; government should engage in deficit spending
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Keynesian view of inflation
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prices and wages are flexible in the upward direction; increase in AD can cause inflation whgen economy is close to full employment; (easier to self-correct for inflation than recession)
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Marginal Propensity to consume
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the fraction of each additional dollar of disposable income spent on consumption; fraction of CHANGE in disposable income that is consumed
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MPC
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Change in consumption / change in disposable income; Delta C over Delta Y sub D
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Marginal Propensity to save
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the fraction of a CHANGE in disposable income that is saved
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mps
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equals 1 - MPC
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MPS + MPC
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is always 1
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Average propensity to save
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Percentage of total income saved; savings / income
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Average propensity to consume
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total consumption in a given time period / disposable income; C over Y sub d
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APC + APS
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always equals 1
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The Multiplier
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number that indicates how many dollars of increase in real GDP result from each dollar of new autonomous expenditure
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The Multiplier
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equals change in real GDP / change in autonomous expenditures
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Change in real GDP
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equals multiplier X change in autonomous expenditures
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The Multiplier
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equals 1 / 1 - MPC
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The Multiplier
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equals 1/MPS
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undesired inventory
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unwanted additions to inventory, usually because of decreases in demand
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Desired investment
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purchases of new plants and equipment plus an y desired changes in business inventories; also called d"planned investment"
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Actual investment
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purchases of new plants and entrapment plus actual changes in business inventories, desired or otherwise
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Actual investment
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equals desired investment + undesired investment
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Investment spending
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reduction in investment spending implies a reduction in household income
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The Multiplier- Rationale
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economy has repetitive continuous flows of expenditures and income; any change in income will cause both C and S to vary in the same direction as the change in income, though by a fraction of it
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The larger the MPC
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the larger the multiplier
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