# Shared Flashcard Set

## Details

Aggregate expenditure
Consumption function + Multiplier
12
Economics
08/06/2011

Term
 Aggregate expenditure
Definition
 The total amount that firms and households plan to spend on goods and services at each level of income.
Term
 Macroeconomic equilibrium
Definition
 Occurs when the desired level of expenditure in the economy exactly equals the level of output produced, and the income earned from that production.
Term
 The Keynesian model
Definition
 Based on the relationship between the level of income received by households, and the level of consumption and saving which occurs.
Term
 45 degree line
Definition
 Plots all the points where equilibrium could occur, as expenditure is equal to income and output.
Term
 Consumption function
Definition
 Model showing the relationship between the level of income received by households and the level of consumption and saving which occurs. Expressed by the formula C = a + bY.
Term
 Multiplier assumptions
Definition
 - consumption increases as income increases- investment is autonomous of level of income- no government or overseas sectors- income can be spent or saved.
Term
 MPC
Definition
 the fraction of the last (marginal) dollar of income which is spent on consumption when income changes.
Term
 MPC
Definition
 the slope of the consumption function, the greater the MPC (closer to 1) the steeper the consumption multiplier.
Term
 Multiplier
Definition
 A change in one of the components of aggregate expenditure (ie. C, I, G X-M) will bring about a relatively larger change in the aggregate level of income, output and expenditure. ie. The level of economic activity when a new equilibrium is reached.
Term
 Multiplier
Definition
 The more willing people are to spend any extra income they receive the higher the value of the multiplier and the greater the impact of any change in expenditure on the level of AE.
Term
 Multiplier formulas
Definition
 K = 1 /MPS or K = 1/1MPC
Term
 Initial increase in investment causes...
Definition
 increase in output = decrease in unemployment = increase in income = increase in consumption = increase in demand for g + s = decrease in inventories = increase output...
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