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29 Cards in this Set
- Front
- Back
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Key Ideas |
The Consumption Function Marginal Propensity to Consume (MPC) Types of Expenditures Autonomous Expenditures Aggregate Expenditure Line Aggregate Demand Curve Simple Spending Multiplier |
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Aggregate Expenditure |
measure of sum of all the expenditures by an economy - measure of GDP as a function of income Y = C + G + I +(X - IM) Y = GDP C = Consumption G = Govt. Spending I = Investments X = exports IM = imports (X - IM) = net imports |
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The Consumption Function |
The consumption as a function of disposable income if disposable income increases, so will the consumption DI = Savings + Consumption Y - NT = DI |
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Marginal Propensity to Consume |
Slope of the Consumption Function - the % of the disposable income that people are spending on buying stuff (not saving) MPC = Δconsumption / Δincome |
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Non-Income Determinants of Consumption |
- things other than income can also affect consumption - these will shift the consumption function up/down i) Net Wealth ii) Price Level iii) Interest Rate iv) Expectations |
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Autonomous Variable |
the variable that is not affected by a change in income |
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Net Wealth & Consumption |
- stock variable - increase in net wealth will shift the CF upwards |
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Price Level & Consumption |
- when price level increases so does the real value of money - if price level goes up, the $20k in your bank can buy less - people able to buy less therefore consume less Price Level ^ = Consumption Function \/ Price Level \/ = Consumption Function ^ |
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Interest Rate & Consumption |
- higher interest rate results in houses saving more and spending less - CF goes down - lower interest rate results in households spending more - CF goes up |
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The Life Cycle Hypothesis |
i) Young people borrow money for education & housing ii) in middle age people pay of debt & save more iii) in old age people draw down savings - net savings over life time stays the same - hence fraction of saving in an economy stays the same |
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Investments |
spending on i) factories, office buildings, equipment ii) new housing iii) net increase in inventory |
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Govt. Spending |
spending on g/s by the government(not including transfer payments) |
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Interest Rate for Expenditure |
opportunity cost of firms investing in capital |
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Investment Demand Curve |
- people more interested in investing if the opportunity cost is lower lower interest rate - more demand for investments |
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Investment Function |
- investments depend on interest rate and not disposable income - it is autonomous - certain factors can shift the line up and down - constant in aggregate expenditure formula |
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Non-Income Determinants of Investments |
Market Interest Rates - if interest rate goes up, investments goes down Business Expectations - if business expects more profits, they will invest more (IF goes up) |
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Govt. Purchase Function |
Autonomous - not affected by income (constant in the aggregate expenditure formula) |
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Net Exports |
Autonomous - when Canadians have more money we buy more from other countries - when other countries have more money they buy more from us |
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Aggregate Expenditure |
Expenditure method of calculating GDP Components: Consumption (C) Govt. Spending (G) Investments (I) Net Exports (NT) C increases with income (linear) G, I, NT are autonomous and constants in the equation Aggregate Expenditure = C + I + G + NT C = 𝘾 +b(Y - NT) |
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Aggregate Expenditure Line (AEL) |
Equation: [𝘾 + b(Y - NT)] + G + I + NT shows how much all aspects of economy spend - since C is the only changing variable, slope of AEL is slope of C which is MPC Equilibrium point is AE = GDP |
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Spending Exceeds GDP (AEL) |
- spending exceeds GDP - consumption exceeds production - more demand than supply - usually price would increase ,but in AEL price can't increase - production increases to accommodate the greater demand |
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Spending is Less than GDP (AEL) |
- GDP exceeds spending - consumption is less than demand - more supply than demand - usually price would drop but in AEL price can't change - firms cut down on production instead |
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Simple Spending Multiplier |
Assume Same Price Level If the spending increases, the GDP will increase by a certain multiple of the spending increase. This is dependent on the MPC. 1 /1 - MPC Example: MPC = 0.8 Spending Increase by $20B 1/1-0.8 = 5 GDP increase by 5(20) = $100B |
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Spending Increase Cycle/Rounds |
1. Spending somehow increases 2. Firms produce more to match the GDP with the Expenditure increase 3. Firms producing more causes incomes to rise which causes Expenditure to rise 4. Repeat |
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Aggregate Demand Curve (ADC) |
Expenditure is the demand via consumption. We calculate the different expenditure at different price levels and plot them on a Aggregate demand curve. |
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Higher Price Level on ADC |
a higher price level - money is worth more and buys less - buy less = less consumption = lower expenditure - expenditure line shifts down so GDP goes down |
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Lower Price Level on ADC |
lower price level - money is worth less and buys more - buy more = more consumption = higher expenditure - higher expenditure means GDP goes up |
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Aggregate Expenditure v/s Aggregate Demand |
Aggregate expenditure shows the different spendings of economy at a fixed price level Aggregate demand show shows the GDP at different price levels |
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Shifts of the Aggregate Demand Curve |
If the aggregate expenditure curve at one price level changes (due to consumption increase or other constants) , the aggregate demand curve will also shift for the whole economy. |
