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Macroeconomics - Chapter 21
McGill University Econ 295 - Ragan
23
Economics
Undergraduate 4
02/01/2012

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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 economy
There 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 save
APS = 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 income
AE= 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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