Term
| Desired aggregate expenditure (AE) |
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Definition
| AE is the sum of desired or planned spending on domestic output by households, firms, governments and foreigners. |
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Term
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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. |
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Term
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Definition
| Any component of expenditure that is systematically related to national income |
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Term
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Definition
| An economy that has no foreign trade in goods, services or assets |
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Term
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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. |
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Term
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Definition
-No Government
-No exports or Imports.. Closed economy
There are two possible used of disposable income: consumption and saving. |
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Term
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Definition
| All disposable income that is not put to consumption |
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Term
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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 |
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Term
| Consumption Function: disposable income |
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Definition
| Holding constant other determinants of desired consumption, an increase in disposable income is assumed to lead to an increase in desired consumption. |
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Term
| Marginal Propensity to Consume |
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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 |
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Term
| Average Propensity to Consume |
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Definition
APC is the desired consumption expenditure divided by disposable income
APC= C/ Yd |
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Term
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Definition
| Break even level of income. When consumption function is above the line, the desired consumption is greater than disposable income |
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Term
| Average Propensity to Save |
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Definition
APS is the proportion of disposable income that households want to save
APS = S / Yd |
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Term
| Marginal Propensity to Save |
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Definition
MPS related to the change in desired savings to the change in disposable income that brought it about.
MPS= ^S/^Yd |
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Term
| Shifts in the consumption function |
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Definition
| The consumption function shifts upwards with an increase in wealth, a decrease in interest rates or an increase in optimism about the future. |
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Term
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Definition
| The saving function shifts downward with an increase in wealth, a decrease in interest rates, or an increase in optimism about the future. |
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Term
| Movement along the consumption function |
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Definition
| A movement along the consumption function shows changes in consumption induced by changes in disposable income |
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Term
| Opportunity cost of interest rate |
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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. |
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Term
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Definition
AE is the function that relates desired expenditure to actual national income
AE= C + I |
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Term
| Marginal Propensity to Spend |
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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. |
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Term
| National Income in Equilibrium |
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Definition
National Income is in equilibrium when desired aggregate expenditure equals actual national income.
Y= AE |
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Term
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Definition
| A change in autonomous expenditure increases equilibrium national income by a multiple of the initial change in autonomous expenditure. |
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Term
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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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