Principles of Macroeconomics Chapter 10 – Flashcards
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45 Degree Line
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A reference line. At each point on the 45 degree line, consumption would = disposable income (C=DI). Therefore, the distance between the 45 degree line and any point on the horizontal axis measures either consumption or disposable income
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Consumption Schedule
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The relationship between consumption expenditures and income for the household sector. The income measure commonly used is national income or disposable income. Occasionally a measure of aggregate production, such as gross domestic product, is used instead.
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Saving Schedule
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The relationship between saving and income for the household sector. The income measure commonly used is national income or disposable income. Occasionally a measure of aggregate production, such as gross domestic product, is used instead
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Break-even Income
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This is the income level at which households plan to consume their entire incomes (C = DI)
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Average Propensity to Consume (APC)
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The fraction/percentage of total income that is consumed... = Consumption/Income
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Average Propensity to Save (APS)
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The fraction of total income that is saved.... = Saving/Income
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Marginal Propensity to Consume (MPC)
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The proportion or fraction of any change in income consumed... = change in consumption/change in income
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Marginal Propensity to Save (MPS)
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The fraction of any change in income saved... = change in saving/change in income
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Nonincome Determinants of Consumption and Saving
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Wealth, borrowing, expectations, and interest rates
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Wealth Effect
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Events sometimes suddenly boost the value of existing wealth. When this happens, households tend to increase their spending and reduce their saving. It shifts the consumption schedule upward and the savings schedule downward
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Paradox of Thrift
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The possibility that a recession can be made worse when households become more thrifty and save in response to the downturn
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Other important considerations regarding consumption and saving schedules
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Switching to real GDP, changes along schedules, simultaneous shifts, taxation, and stability
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Expected Rate of Return
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It is calculated by taking the average of the probability distribution of all possible returns
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Investment Demand Curve
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Shows the amount of investment forthcoming at reach real interest rate. The level of investment depends on the expected rate of return and the real interest rate
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Shifts of the Investment Demand Curve
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Acquisition, maintenance and operating costs, business taxes, technological change, stock of capital on hand, planned inventory changes, expectations
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Instability of Investment
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Variability of expectations, durability, irregularity of innovation, variability of profits
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The Multiplier Effect
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Multiplier = Change in Real GDP/Initial Change in Spending
