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;
42 Cards in this Set
- Front
- Back
|
Some Simplifying Assumptions in a Keynesian Model
|
To simplify the income determination model
Businesses pay no indirect taxes (sales tax) Businesses distribute all profits to shareholders There is no depreciation The economy is closed; no foreign trade |
|
|
Real Disposable Income
|
Real GDP minus net taxes, or after-tax real income
|
|
|
Consumption
|
Spending on new goods and services out of a household’s current income
Whatever is not consumed is saved. Consumption includes such things as buying food and going to a concert |
|
|
Saving
|
The act of not consuming all of one’s current income
Whatever is not consumed out of spendable income is, by definition, saved. Saving is an action measured over time (a flow). Savings are a stock, an accumulation resulting from the act of saving in the past |
|
|
Consumption Goods
|
Goods bought by households to use up, such as food and movies
|
|
|
Consumption plus saving equals _______.
|
disposable income
|
|
|
______ equals disposable income minus consumption.
|
Saving
|
|
|
Investment
|
Spending by businesses on things such as machines and buildings, which can be used to produce goods and services in the future
The investment part of real GDP is the portion that will be used in the process of producing goods in the future. |
|
|
Capital Goods
|
Producer durables; nonconsumable goods that firms use to make other goods
|
|
|
Keynes argued that
|
-The interest rate is not the most important determinant of individual’s real saving and consumption decisions.
-Real saving and consumption decisions depend primarily on a household’s real disposable income. |
|
|
Keynes was concerned with changes in...
|
AD
|
|
|
Consumption Function
|
The relationship between amount consumed and disposable income
A consumption function tells us how much people plan to consume at various levels of disposable income |
|
|
Dissaving
|
Negative saving; a situation in which spending exceeds income
Dissaving can occur when a household is able to borrow or use up existing assets |
|
|
45-Degree Reference Line
|
The line along which planned real expenditures equal real GDP per year
|
|
|
Autonomous Consumption
|
The part of consumption that is independent of the level of disposable income
Changes in autonomous consumption shift the consumption function |
|
|
Average Propensity to Consume (APC)
|
Real consumption divided by real disposable income
The proportion of total disposable income that is consumed APC= RC/RDI |
|
|
Average Propensity to Save (APS)
|
Real saving divided by real disposable income (DI)
Saved proportion of real DI APS= RS/RDI |
|
|
Marginal Propensity to Consume (MPC)
|
The ratio of the change in real consumption to the change in real disposable income
MPC= CRC/ CRDI |
|
|
Average propensity to consume and average propensity to save must sum to ____ of ______
|
100%
total income |
|
|
Marginal propensity to consume and marginal propensity to save must sum to ___ of the ______
|
100%
change in income. |
|
|
Causes of shifts in the consumption function
|
A change besides real disposable income will cause the consumption function to shift
|
|
|
Non-income determinants of consumption
|
Population
Wealth |
|
|
Wealth
|
The stock of assets owned by a person, household, firm or nation
For a household, wealth can consist of a house, cars, personal belongings, stocks, bonds, bank accounts, and cash. |
|
|
We are interested in determining the equilibrium level of real GDP per year
|
Consumption as a function of real GDP
The 45-degree reference line |
|
|
Saving and investment: planned versus actual
|
Only at equilibrium real GDP will planned saving equal actual saving.
Planned investment equals actual investment. Hence planned saving is equal to planned investment. |
|
|
Unplanned decreases in business inventories
|
Business will increase production of goods and services and increase employment
Ultimately there will be an increase in real GDP |
|
|
Unplanned increases in business inventories
|
Consumers purchase fewer goods and services than anticipated
This leaves firms with unsold products and inventories will rise Businesses respond by cutting back production and reducing employment |
|
|
Lump-Sum Tax
|
A tax that does not depend on income or the circumstances of the taxpayer
|
|
|
The Equilibrium Level of Real GD
|
Observations
If C + I + G + X = Y Equilibrium GDP If C + I + G + X > Y Unplanned drop in inventories Businesses increase output Y returns to equilibrium If C + I + G + X < Y Unplanned rise in inventories Businesses cut output Y returns to equilibrium |
|
|
Multiplier
|
The ratio of the change in the equilibrium level of real national income to the change in autonomous expenditures
The number by which a change in autonomous real investment or autonomous real consumption is multiplied to get the change in equilibrium real GDP |
|
|
Multiplier formula
|
=1/1-MPC
=1/MPS |
|
|
The smaller the MPS, the____ the multiplier.
|
larger
|
|
|
The larger the MPC, the____ the multiplier.
|
larger
|
|
|
Measuring the change in equilibrium income from a change in autonomous spending
|
Change in
|
|
|
Significance of the multiplier
|
It is possible that a relatively small change in consumption or investment can trigger a much larger change in real GDP.
|
|
|
The Relationship Between Aggregate Demand and the C + I + G + X Curve
|
There is a major difference between the two:
C + I + G + X curve drawn with price level constant AD curve drawn with the price level changing |
|
|
The relationship between saving and consumption
|
Consumption plus saving equals disposable income.
|
|
|
Key determinants of consumption and saving in the Keynesian model
|
In the Keynesian model, the primary determinant is disposable income.
DI increases, so does C |
|
|
The key determinants of planned investment
|
The interest rate, business expectations, productive technology, and business taxes
|
|
|
How equilibrium real GDP is established in the Keynesian model
|
Equilibrium national income occurs where the C + I + G + X schedule crosses the 45-degree line.
|
|
|
Why autonomous changes in total planned expenditures theoretically have a multiplier effect on equilibrium real GDP
|
As consumption increases, so does real GDP, which induces further consumption spending.
The ultimate expansion of real GDP is equal to the multiplier times the increase in autonomous expenditures. |
|
|
The relationship between total planned expenditures and the aggregate demand curve
|
AD consists of consumption, investment, and government purchases, plus the foreign sector.
Difference C + I + G + X curve drawn with price level constant AD with the price level changing |
