Chapter 13 Consumption, Saving, Investment, and the Multiplier

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disposable income

the income a consumer has left over to spend or save once he has paid out his net taxes

consumption and saving schedules

tables that show the direct relationships between disposable income and consumption and saving

consumption function

a linear relationship showing how increases in disposable income cause increases in consumption

autonomous consumption

the amount of consumption that occurs no matter the level of disposable income

saving function

a linear relationship showing how increases in disposable income cause increases in saving

dissaving

another way of saying that saving is less than zero

autonomous saving

the amount of saving that occurs no matter the level of disposable income

marginal propensity to consume

the change in consumption caused by a change in disposable income, or the slope of the consumption function

marginal propensity to save

the change in saving caused by a change in disposable income or the slope of the saving function

determinants of consumption and savings

factors that shift the consumption and saving functions in the opposite direction are wealth, expectations, and the household debt.

expected real rate of return

the rate of real profit the firm anticipates receiving on investment expenditures

real rate of interest

the cost of borrowing to fund an investment

decision to invest

a firm invests in projects so long as r is greater than or equal to i

investment demand

the inverse relationship between the real interest rates and the cumulative dollars invested

autonomous investment

the level of investment determined by investment demand

market for loanable funds

the market for dollars that are available to be borrowed for investment projects

demand for loanable funds

the negative relationship between the real interest rate and the dollars invested by firms

private saving

saving conducted by households and equal to the difference between disposable income and consumption

public saving

saving conducted by government and equal to the difference between tax revenue collected and spending on goods and services

supply of loanable funds

the positive relationship between the dollars saved and the real interest rate

multiplier effect

describes how a change in any component of aggregate expenditures creates a larger change in GDP

spending multiplier

the magnitude of the spending multiplier effect is calculated as =(change in GDP)/(change in spending) = 1/MPS = 1/(1-MPC)

tax multiplier

the magnitude of the effect that a change in taxes has on real GDP = (change in GDP)/(Change in taxes) = MPC * multiplier = MPC/MPS

balanced-budget multiplier

when a change in government spending is offset by a change in lump-sum taxes, real GDP changes by the amount of the change in G; the balanced-budget multiplier is thus equal to one

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