Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
23 Cards in this Set
- Front
- Back
|
Disposable Income DI
(cpt10 pg189) |
Consumption + Savings = DI
OR Savings = Disposable Income - Consumption |
|
|
If S = 0
If Savings = zero pg 180) |
C = DI
Consumption = Disposable Income |
|
|
45-degree line
(pg189) |
Graphically, line where S=0
Verticale distance between plot point & 45 degree line is the savings (S) for the year |
|
|
Average Propensity to Consume
APC (pg 192) |
Percentage of income consumed
APC = C / I APC = comsumption divided by income |
|
|
APC Chart
(pg190) |
at DI = 70, S =10
APC 60/70 = .857 405 / 410 = .987 (.99) APC and .01 of savings APS |
|
|
Average Propensity to Save
APS |
fraction of total income that is saved
APS = S / I APS = saving divided by income |
|
|
Marginal Propensity to Consume
MPC (cpt10 pg192) |
Percentage (fraction) of any change to income
|
|
|
MPC
|
MPC = change in consumption / change in income
MPC = 8/10 = .8 |
|
|
Marginal Propensity to Save
MPS |
Persentage of each additional $ of income saved
|
|
|
MPS
|
MPS = change in savings / change in income
MPS = 2/10 = .2 |
|
|
MPC + MPS = 1
"always" |
The sum of MPC and MPS for any change in disposable income must always be 1
|
|
|
Non-income factors in Consumption
Wealth Borrowing Expectations Real Interest Rates |
Wealth (wealth effect)
as wealth increases; C increases (C line moves up)and S decreases (S line moves down) |
|
|
Expectations
|
Expected inflation leads to increased spending
Expected recession leads to decreased spending |
|
|
Real Interest Rates
|
As they rise, borrowing becomes for difficult
Spending lowers |
|
|
Real GDP
|
Lines shift itself (not movement up or down the line)
|
|
|
INterest rates & Investment
|
spurred by the expected rate of return
|
|
|
Lower interest rate
|
Higher the investment
|
|
|
expected ROR (Rate of Return)
(pg196) |
divide the profit by the cost of the machine
Profit of $100 on $1000 investment is r = 10% |
|
|
Multiplier effect
(cpt10 pg201) |
Multiplier = change in real GDP / initial change in spending
OR Change in GDP = multiplier x initial change in spending |
|
|
How to calculate the Multiplier
(pg203) |
Multiplier = (1 / 1-MPC) = 1/MPS
recall that MPC + MPS = 1 (always) |
|
|
Crowing-out effect
Definition (cpt13 pg 265, 269-271) |
A rise in interest rates and a resulting decrease in Planned investment caused by the Federal government's increased borrowing to finance budget deficits and refinance debt.
|
|
|
Crowding-out
see exam #2 question 6 |
Increase interest rate
Decrease investment spending |
|
|
Crowding-out formula
C x M = M x(1-COE) C = 1-COE C + COE = 1 |
C x M = M x (1- C.O.E)
example: 4 (1 - 50%) = 4(50%) = 4(0.5) = 2 |
