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34 Cards in this Set
- Front
- Back
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How can you calculate saving? |
Disposable income minus consumption |
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What is the consumption schedule? |
shows the amounts households plan to spend for consumer goods at different levels of disposable income |
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What is the savings schedule? |
shows the amounts households plan to save (plan not to spend on consumer goods), at different levels of disposable income |
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What is dissaving? |
consuming in excess of after-tax income |
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What is break-even income? |
the level of disposable income at which households plan to consume (spend) all their income and to save none of it |
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What is the average propensity to consume? (APC) |
the fraction or percentage of total income that is consumed |
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What is the average propensity to save? (APS) |
the fraction of total income that is saved |
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How can you calculate APC? |
APC= consumption / income |
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How can you calculate APS? |
APS= saving / income |
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What happens to APC, and APS as disposable income rises? |
APC falls and APS rises |
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What is the marginal propensity to consume? (MPC) |
the fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income |
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What is the marginal propensity to save? (MPS) |
the fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income |
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How do you calculate the MPC? |
MPC= change in consumption/ change in income |
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How do you calculate MPS? |
MPS= change in saving / change in income |
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What will the sum of MPC and MPS always be? |
always equal to one |
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What are the non income determinants of consumption and saving? |
-Wealth -Borrowing -Expectations -Real interest rates |
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What is wealth? |
the dollar amount of all the assets that it owns minus the dollar amount of its liabilities (all the debt that it owes) |
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What is the wealth effect? |
the tendency for people to increase their consumption spending when the value of their financial and real assets rises, and to decrease their consumption spending when the value of their assets fall |
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What are the basic determinants of investment spending? |
-Expected returns (profits) -Interest rate |
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What is investment spending guided by? |
the profit motive; businesses buy capital goods only when they think such purchases will be profitable |
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What is the expected rate of return? |
the increase in profit a firm anticipates it will obtain by purchasing capital (or engaging in research and development); expressed as a percentage of the total cost of the investment activity |
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What is a real interest rate? |
the interest rate expressed in dollars of constant value (adjusted inflation) and equal to the nominal interest rate less the expected rate of inflation |
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What is a nominal interest rate? |
the interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation |
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What is the investment demand curve? |
shows the amount of investment forthcoming at each real interest rate. The level of investment depends on the expected rate of return and the real interest rate |
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What can effect the expected rate of return on investment? |
the initial costs of capital goods, and the estimated costs of operating and maintaining those goods |
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Increase vs decrease in inventory? |
An increase in inventory is counted as a positive investment, while a decrease in inventory is counted as negative investment |
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What is the most volatile component of total spending? |
Investment. It is unstable and rises and falls very often. |
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Which factors explain the variability of investment? |
1.) durability 2.) irregularity of innovation 3.) variability of profits 4.) variability of expectations |
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A specific investment with be undertaken if? |
the expected rate of return, r, equals or exceeds the real interest rate, i |
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When will the investment demand curve shift? |
when changes occur in: -the cost of acquiring, operating, and maintaining capital goods -business taxes -technology -the stock of capital goods on hand -business expectations |
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What is the multiplier effect? |
a change in a component of total spending leads to a larger change in GDP. The multiplier determines how much larger that change will be; it is the ratio of a change in GDP to the initial change in spending |
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How do you calculate the multiplier? |
Multiplier= change in real GDP/ initial change in spending Change in GDP= multiplier x initial change in spending |
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What is the calculation for the MPC and multiplier? |
Multiplier= 1/ 1-MPC *these two are directly related |
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What is the calculation for the MPS and multiplier? |
Multiplier= 1 / MPS *these two are inversely related |
