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29 Cards in this Set
- Front
- Back
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The Key Assumption of the Basic Keynesian Model
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In the short run, firms meet the demand for their products at present price. |
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Menu Cost
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Cost of changing prices. This includes the cost of doing market surveys to determine what consumers will pay for their products, informing customers of price changes, etc...
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Planned Aggregate Expenditure (PAE)
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Total planned spending on final goods and services.
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Four Components of Aggregate Expenditure |
(1) Consumer Expenditure (C) (2) Private-Sector Investment (I) (3) Government Purchases (G) (4) Net Exports (NX) |
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Consumer Expenditure |
Spending by households on final goods and services. Examples: food, clothes, entertainment, furniture, cars... |
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Private-Sector Investment (I)
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Spending by firms on new capital goods (includes new houses and apartment buildings, and changes in inventories). Examples: buildings, factories, and equipment. DOES NOT include stocks and bonds.
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Government Purchases (G)
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Spending by government on goods and services. Example: new schools, hospitals, roads, public sector employees, etc... |
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Net Exports (NX)
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Exports minus imports. Exports are sales of domestically produced goods and services produced to foreigners; imports are purchases by domestic residents of goods and services purchases abroad.
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Disposable Income
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Income that includes the addition of transfers (such as employment insurance premiums) and the deduction of taxes. |
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Net taxes
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Refers to taxes minus transfers |
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Consumption function |
The relationship between consumption spending and its determinants, such as disposable (After tax and transfer) income. C = C. + mpc(Y-T) Where: C.: factors other than disposable income |
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Wealth Effect
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The tendency of changes in asset prices to affect households' wealth and thus their spending on consumption goods and services.
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Asset price Bubble
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Occurs when the price of financial or real asset or asset category rises much more rapidly than prices in general and by much more than can be explained by fundamental factors.
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Marginal Propensity to Consume (mpc)
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The amount by which consumption rises when disposable income rises by $1; we assume that 0 |
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Average Propensity to Consume (APC)
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Consumption divided by disposable income.
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The intercept of the consumption function on the vertical axis equals the constant term (C.), and the slope of the consumption function equals the marginal propensity to consume (mpc). |
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Autonomous Expenditure
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The portion of planned aggregate expenditure that is independent of output.
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Induced Expenditure
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The portion of planned aggregate expenditure that depends on output, Y
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Short-Run Equilibrium Output
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The level of output at which Y equals planned aggregate expenditure; the level of output that prevails during the period in which prices are predetermined. Y=PAE |
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Red Line: Y=PAE Blue Line: Shows relationship between planned aggregate expenditure and output, Y. |
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Income Expenditure Multiplier
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The effect of a one-unit increase in autonomous expenditure on short-run equilibrium output. Multiplier = 1/(1-mpc) |
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Stabilization Policies
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Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps.
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Contradictory Policies
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Government policies actions designed to reduce planned spending and output.
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Expansionary Policies
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Government policy actions intended to increase planned spending and output.
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Discretionary Fiscal Policy
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Changes in government spending and taxation deliberately made to stabilize planned aggregate expenditure.
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Automatic Stabilizers
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Provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines.
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Government Debt Stability
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The condition that the government debt-to-GDP ratio does not change.
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Marginal Propensity to Import
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The amount by which imports rise when income rises by $1.
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Economy-wide Marginal Tax Rate
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The amount by which taxes rise when income rises by $1.
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