1) Disposable income

2) Real interest rate

3) Wealth

4) Expected future income

Consumption Function Relationship and Curve

Savings Function Relationship and Curve

Consumption func. is relationship b/w consumption expen. (C) and disposable income

Savings func. is relationship b/w savings (S) and disposable income

Consumption function is shown with a 45 degree line sloping up, savings function is shown sloping up and hitting the x-axis on its own.

MPC = Change in C/Change in YD (Slope of consum. func.)

MPS = Change in S/Change in YD (Slope of savings func.)

MPC + MPS = 1

C = Consumption Expenditure, S = Savings, YD = Disposable Income

Induced expenditure is consumption expenditure minus imports which varies with real GDP.

Autonomous expenditure is the sum of investment, gov. expen. and exports, it does not vary with real GDP.

Autonomous expenditure can also have consumption and import components if they don't vary w/ real GDP.

Actual is equal to real GDP or shown by the equation

AE = C+I+G+X-M but planned expenditure is not exactly equal, there could be inventories that are greater or smaller meaning if inventory is left unsold (unplanned inventories) then it is less then real GDP.

The amount by which a change in automous expenditure is magnified to determine the change in equilibrium expenditure and real GDP. Cause by induced also being affected and changing real GDP a second time.

Multiplier = Change in equilibrium expen/Change in autonomous expen. or = 1/MPS

1) Wealth effect

2) Substitution effect (2)

Do previous chapter flash cards for reasons.

In long run when the # of money (AD Curve) grows faster then potential GDP (LAS Curve)

In short run when one of two effects occur

Inflation must be persistent increase in # of money.

1) Demand-pull (AD shifts to right and SAS shifts to left)

2) Cost-push (SAS Curve shifts left, Bank of CAD increases AD and it shifts to the right)

1) An increase in the money wage rate

2) An increase in the money prices of raw materials

The nominal wage rate will respond accordingly.

If the expectations are right then nothing goes wrong.

If expectations are wrong then we move away from potential GDP, real GDP is either lower or higher.

Use the quantity theory formula

Inflation rate = Money growth rate + Rate of velocity change - Real GDP growth rate

Anticipated is okay.

Unanticipated can cause a decrease in real GDP, employment and re-distributes wealth and income

In short run is represents relationship b/w inflation and unemployment with

1) expected inflation rate and

2) natural employment held constant

In long run it is the inflation rate and unemployment with the actual inflation rate equal to the expected inflation rate (LRPC is a straight line, real wage is constant)

A change in expected inflation causes the LRPC curve to have a movement, SRPC shifts left and expected inflation decreases

A change in natural unemployment rate shifts both LRPC and SRPC, an increase shifts them rightward

1) Finance activites for federal gov.

2) Achieve macroeconomic objectives

Debt is the historical amount you owe

(sum of past deficits - sum of past surpluses)

Deficit is the amount you owe in the current period

1) Transfer payments

2) Expenditure on goods

3) Debt interest

1) Personal income taxes

2) Corporation income taxes

3) Indirect and other taxes

4) Investment income

1) Automatic Stimulus

2) Discretionary Stimulus

1) Tax revenue

2) Transfer payments

In a boom period both decrease disposable income and decrease AD.

1) Cyclical Surplus/Deficit

2) Structural Surplus/Deficit
Cyclical occurs when real GDP is not equal to potential GDP

Structural occurs when real GDP is equal to potential GDP (Straight line) 

1) Government expenditure (G) multiplier

2) Tax (T) multiplier

1) Recognition lag

2) Law-making lag

3) Impact lag

T multiplier affects aggregate supply more and has a small impact on AD.

G affects AD a lot more and has less of an impact on aggregate supply.