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Marginal propensity to consume (MPC)

increase in consumer spending when disposable income rises by $1

Marginal propensity to save (MPS)

increase in household savings when disposable income rises by $1

autonomous change in aggregate spending

change in desired level of spending by firms, households or govt at a level of real GDP

multiplier

ratio of total change in real GDP caused by a change in aggregate spending to the size of the change

consumption function

shows how a households consumer spending varies when their disposable income does

aggregate consumption function

relationship between aggregate current disposable income and aggregate consumer spending

planned investment spending

spending that businesses intend to undertake during a given time

accelerator principle

higher growth rate of real GDP = higher planned investment spending (and vice versa)

inventory investment

value of the change of total inventories in economy during giving time

unplanned inventory investment

actual sales are more or less than expected

actual investment spending

sum of planned and unplanned investment spending

planned aggregate spending

total amount of planned spending in the economy

income-expenditure equilibrium

agg output = planned agg spending

income - expenditure equilibrium GDP

real GDP = planned agg spending

Keynesian cross

Diagram
identitfies income-expenditure equilibrium as point where planned agg spending cross 45 degree line

As the MPC gets larger the ____________ gets larger

multiplier

the slope of the consumption function =

marginal propensity to consume

downturn in economy = ppl think disposable income will be low =

consumption function will shift down

T/F investment spending fluctuates more than consumer spending?

True

if expected future GDP rises then...

investment spending increases

slope of consumption function =

slope of marginal propensity to consume

slope of aggregate expenditure line =

marginal propensity to consume

income expenditure equilibrium occurs when:

agg output = planned agg spending

real equilibrium GDP will fall when:

unplanned inventory investment is positive

If aggregate planned expenditures increase in the economy by 100 million, then

real GDP increase more than 100 million

During Great Depression what decreased?

consumption and investment

The larger the value of the MPS...

value of the multiplier will be smaller

T/F past disposable income impacts consumer spending

false

2/3 of total spending is attributed to:

consumption

If housing prices begin to rise nationwide:

increase in consumer spending

decrease in consumer spending, most economists believe:

there was a decrease in investment spending

marginal propensity to save is:

change in saving/change in disposable income

slope of the consumption function equals:

1 - MPS

permanent income hypothesis

spending depends on income people expect not on what they currently have

life cycle income hypothesis

consuming more now and will continue to do so but consumption will smooth out over her lifetime

interest rates and planned investment spending have what kind of relationship?

negative

accelerator principle

higher rate of growth in real GDP will lead to higher planned investment spending

multiplier process assumes that:

economy is operating with sticky aggregate price levels

if unplanned inventory investment is positive then:

agg expenditures on goods/services is less than expected

income expenditure model:

inventories are constantly changing and provide insight into the future state of the economy

after an economic slow down

inventory levels rise

current consumption spending is usually determined by:

household income

the verticle axis on the consumption function is:

autonomous consumption spending

the horozontial axis on the consumption function is:

disposable income

A firm that finances its investment by using its own retained earnings

incurs an opp cost equal to the market interest rate

Why was there a surge in housing starts during the years 2000 to 2006?

low interest rates lead to large increase in construction of homes

slope of agg consumption function is equal to:

MPC

output expands when:

planned agg spending > GDP

when GDP > equilibrium

unplanned inventories accumulate

The amount of the change in real GDP arising from an initial change in aggregate spending is equal to

the value of the multiplier times the initial change in aggregate spending.

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