# Shared Flashcard Set

## Details

Macroeconomics - Chapter 21
McGill University Econ 295 - Ragan
23
Economics
02/01/2012

Term
 Desired aggregate expenditure (AE)
Definition
 AE is the sum of desired or planned spending on domestic output by households, firms, governments and foreigners.
Term
 Autonomous expenditure
Definition
 Elements of expenditure that do not change systematically with national income. In the consumption function this is the intercept C= 30 + 0.8 Yd .. 30 is the autonomous expenditure. If your disposable income were 0, your desired consumption would be 30.
Term
 Induced expenditure
Definition
 Any component of expenditure that is systematically related to national income
Term
 Closed economy
Definition
 An economy that has no foreign trade in goods, services or assets
Term
 Disposable Income Yd
Definition
 The amount of income households receive after deducting what they pay in taxes. In the simple model of Chapter 21, the disposable income Yd, is equal to national income, since there is no government and no taxation.
Term
 Simple Model Chapter 21
Definition
 -No Government -No exports or Imports.. Closed economyThere are two possible used of disposable income: consumption and saving.
Term
 Saving
Definition
 All disposable income that is not put to consumption
Term
 Consumption Function
Definition
 The consumption function relates the total consumption expenditure of all households to several factors that determine it: -Disposable Income-Wealth-Interest Rates-Expectations about the future
Term
 Consumption Function: disposable income
Definition
 Holding constant other determinants of desired consumption, an increase in disposable income is assumed to lead to an increase in desired consumption.
Term
 Marginal Propensity to Consume
Definition
 MPC related to the change in desired consumption to the change in disposable income that brought it about. MPC = ^C /^Yd This is the slope of the consumption function.in C=30 + 0.8 Yd. 0.8 is the MPC
Term
 Average Propensity to Consume
Definition
 APC is the desired consumption expenditure divided by disposable income APC= C/ Yd
Term
 45 degree line
Definition
 Break even level of income. When consumption function is above the line, the desired consumption is greater than disposable income
Term
 Average Propensity to Save
Definition
 APS is the proportion of disposable income that households want to saveAPS = S / Yd
Term
 Marginal Propensity to Save
Definition
 MPS related to the change in desired savings to the change in disposable income that brought it about.MPS= ^S/^Yd
Term
 Shifts in the consumption function
Definition
 The consumption function shifts upwards with an increase in wealth, a decrease in interest rates or an increase in optimism about the future.
Term
 Shift in saving function
Definition
 The saving function shifts downward with an increase in wealth, a decrease in interest rates, or an increase in optimism about the future.
Term
 Movement along the consumption function
Definition
 A movement along the consumption function shows changes in consumption induced by changes in disposable income
Term
 Opportunity cost of interest rate
Definition
 The real interest rate reflect the opportunity cost associated with investment ( in inventory, residential construction, plant and equipment). The higher the real interest rate, the higher the opportunity cost of investment and thus the lower the amount of desired investment.
Term
 Aggregate expenditure
Definition
 AE is the function that relates desired expenditure to actual national incomeAE= C + I
Term
 Marginal Propensity to Spend
Definition
 The change in desired aggregate expenditure on domestic output divided by the change in national income that brought it. -- the amount of extra total expenditure induced by when national income rises by \$1.
Term
 National Income in Equilibrium
Definition
 National Income is in equilibrium when desired aggregate expenditure equals actual national income. Y= AE
Term
 The Multiplier
Definition
 A change in autonomous expenditure increases equilibrium national income by a multiple of the initial change in autonomous expenditure.
Term
 The Simple Multiplier
Definition
 The ratio of change in equilibrium national income to the change in autonomous expenditure that brought it about, calculated for a constant price level. The size of the simple multiplier depends on the slope of the AE function, that is the marginal propensity to spend. Simple multiplier = ^Y/ ^A = 1/ 1-z
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