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Economics - Chapter 11
McConnell, Brue, Flynn
22
Economics
Undergraduate 2
04/20/2011

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Term
Determinants of Aggregate Demand
Definition
1. Changes in Consumer Spending - wealth, expectations, HH debt, taxes
2. Changes in Investment - real interest rates, expected return, business taxes
3. Government Spending
4. Foreign Sector Spending - dollar appreciates, fewer goods purchased, curve shifts left
Term
Explanations of Downward Slopping Demand Curve
Definition
1. Wealth Effect
2. Interest Rate Effect
3. Foreign Purchases Effect
Term
Determinants of Aggregate Supply
Definition
1. Wage Rates
2. Prices of Non-Labor Inputs
3. Productivity
4. Changes in Real and Institutional Environments
Term
Average Propensity to Consume (APC)
Definition
the fraction of any specific level of disposable income that is spent on consumer goods
Term
Average Propensity to Save (APS)
Definition
the fraction of any specific level of disposable income that is saved
Term
Marginal Propensity to Consume (MPC)
Definition
the fraction of a change in disposable income that is consumed
Term
Marginal Propensity to Save (MPS)
Definition
the fraction of a change in disposable income that is saved
Term
3 Segments of Aggregate Supply Curve
Definition
1. Horizontal - no growth, idle resources, high level of unemployment
2. Curved - growth and expansion of price and production, in the short-run
3. Vertical - cost pressure, pure inflation, can't produce anymore, full employment and full capacity
Term
Investment and Savings =
Definition
Injection and Leakages
Term
Efficiency Wages
Definition
In a recession, firms may want to reduce wages, but will keep efficiency wages. Wages that elicit maximum work effort and thus minimize labor costs per unit of output.
Term
Menu Costs
Definition
In a recession, firms may want to lower costs, but lowering costs creates other costs (re-printing the "menu")
Term
Multiplier
Definition
change in output (GDP) / intial change in spending
-or-
1/MPS
-or-
1/(1-MPC)
Term
Consumption Function
Definition
Cf = a + bYd
A formula to predict how changes in income effect consumption. Explains why it's hard to maintain full employment.

CF = consumption
a = autonomous Consumption
b = MPC
YD = Disposable Income
Term
Calculate Savings (2 ways)
Definition
S = MPS(Y) – 100
-or-
S = Y – C
Term
Investment or Injection Formula
Definition
ADD: Business Spending (Investment), Net Exports (Foreign Spending), Government Spending (These add up to be the same as savings at equilibrium.)
Term
Aggregate Expenditures
Definition
= Cf + I + G + Xn
= Injections + Consumption Function
Term
Say's Law
Definition
supply creates it's own demand (classical theory)
Term
45 degree reference line
Definition
spending is equivalent to income (or output)
Term
Autonomous Consumption
Definition
bare bones consumption
Term
Disposable Income
Definition
Personal income less personal taxes, disposable income is available for saving or consumption
Term
Savings vs. Dissavings
Definition
Save money vs. spending more than your disposable income
Term
Closed Private Economy
Definition
Only households and businesses, no government and not imports/exports
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