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Marginal propensity to consume (MPC)
increase in consumer spending 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
ratio of total change in real GDP caused by a change in aggregate spending to the size of the change
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
higher growth rate of real GDP = higher planned investment spending (and vice versa)
identitfies income-expenditure equilibrium as point where planned agg spending cross 45 degree line
downturn in economy = ppl think disposable income will be low =
consumption function will shift down
If aggregate planned expenditures increase in the economy by 100 million, then
real GDP increase more than 100 million
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
higher rate of growth in real GDP will lead to higher planned investment spending
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
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
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