Chapter 11 Macroeconomics

Front 1

"in the short run, spending depends on...

Back 1

income and income depends on spending"

Front 2

d: short run macro model

Back 2

macroeconomic model that explains how changes in spending can affect real GDP in the short run

Front 3

determinants of consumption spending

Back 3

1) disposable income
2) wealth
3) interest rate
4) expectations

Front 4

disposable income formula

Back 4

disposable income = income - net taxes

net taxes = taxes- transfers

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d: wealth

Back 5

total value of household assets (home, stock, bonds, bank accounts) minus outstanding liabilities (student loans, mortgage loans, credit card debt)

Front 6

what will a rise in wealth cause

Back 6

an increase in consumption spending

Front 7

what will a rise in the interest rate cause

Back 7

decrease in consumption spending
increase in savings
decrease in planned investment

Front 8

how do expectations about the future influence consumption spending

Back 8

if you are more optimistic about the future, you are likely to spend more of your income now

Front 9

what does optimism about the future cause

Back 9

causes an increase in consumption spending

Front 10

what other things can influence consumption spending

Back 10

inheritances, how long you expect to live

Front 11

consumption spending increases when

Back 11

interest rate falls
disposable income rises
wealth rises
optimistic about the future

Front 12

what is the most important and stable factor that influences consumption spending

Back 12

disposable income

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d: consumption function

Back 13

positively sloped relationship between real consumption spending and real disposable income

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d: autonomous consumption spending

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the part of consumption spending that is independent of income

the vertical intercept of the consumption function

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what is the vertical intercept of the consumption function

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autonomous consumption spending

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what does autonomous consumption spending tell us

Back 16

how much we would spend if the disposable income were zero

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what provides an increase in autonomous consumption spending

Back 17

increase in wealth

Front 18

what is the slope of the consumption function

Back 18

the marginal propensity to consume

Front 19

formula for MPC

Back 19

Δconsumption / Δdisposable income

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d: marginal propensity to consume

Back 20

the amount by which consumption spending rises when disposable income rises by a dollar. for each dollar how much you are willing to spend

Front 21

what is the marginal propensity to save

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1- MPC

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what is the consumption equation

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c= a + b x (DI)

consumption spending = autonomous consumption + (MPC X DI)

Front 23

what causes a movement rightward along the consumption income line

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an increase in income

(it increases disposable income, thus increases consumption spending (given taxes are constant))

Front 24

what causes a shift of the consumption income line

(but doesnt work solely on autonomous consumption)

Back 24

a decrease in taxes

(increases disposable income at each income level)

Front 25

what causes a shift of the consumption income line because of a shift of autonomous consumption

Back 25

increase in household wealth, if the interest rate decreased, if households became more optimistic about the future

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net exports is equal to...

Back 26

total exports - total imports

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d: aggregate expenditure

Back 27

sum of spending by households, business the governemnt and teh foreign sector on final goods and services produced in the united states

= C + Ip + G + NX

Front 28

what is the formula for aggregate expenditure

Back 28

AE= C +Ip + G+ NX

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when income increases, aggregate expenditure will rise by...

Back 29

ΔAE = ΔGDP X MPC

Front 30

firms are producing more than they are selling
output will decline
stop hiring workers
inventories are rising

Back 30

GDP> AE

Front 31

firms are selling more than they are producing
output will increase
hire more workers
the extra goods come from inventories

Back 31

GDP < AE

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equilibrium

Back 32

GDP = AE

Front 33

the change in inventories at any given time will always equal

Back 33

GDP - AE

Front 34

what is another way to find GDP equilibrium (other than finding when GDP = AE)

Back 34

find when the inventories are equal to zero

Front 35

what does the 45 degree line allow us to do

Back 35

see the equilibrium of the consumption function graphically

where the 45 degree line crosses the consumption-income line is the equilibrium

Front 36

in the short run macro model what is cyclical unemployment caused by

Back 36

insufficient spending or too much spending

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a change in planned investment, government purchases, net exports, or autonomous consumption sets off what process

Back 37

the multiplier process

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d: expenditure multiplier

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the amount by which equilibrium real GDP changes as a result of one dollar change in autonomous consumption, investment spending, government purchases, or net exports

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the larger the MPC the larger the

Back 39

change in output

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multiplier formula

Back 40

1/(1-MPC) x Δcomponent of ae

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d: automatic stabilizer

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any feature of the economy that reduces the size of the expenditure multiplier and diminishes the impact of spending changes on real GDP

Front 42

what are some automatic stabilizers that safe guard against the multiplier

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1) taxes and transfers
2) imports
3) forward looking behavior

Front 43

how are taxes/transfers an automatic stabilizer

Back 43

as income rises, you pay out more taxes and receive less transfer payments

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what do automatic destablizers do

Back 44

work with the multiplier to make spending changes larger

Front 45

in the short run, automatic destabizers make the economy _____

Back 45

less stable

Front 46

what are 2 examples of automatic destablizers

Back 46

1) asset prices, wealth and consumption
2) output and investment spending

Front 47

how are asset prices, wealth, and consumption automatic destablizers of the multiplier process

Back 47

as wealth increases with the intial round of consumption, you have more money to buy this and things become more attractive such as stocks, so corporate profits increase

Front 48

how is investment spending an automatic destablizer

Back 48

as GDP rises more firms reach their capital limit and require more planned investment
additionally, housing prices rise so more houses need to be build

Front 49

how long does it take the mulitplier to work its way through the economy

Back 49

9 months to a year

Front 50

what are some conditions that must be looked at when considering the real world multiplier

Back 50

country
economic conditions
type and size of spending
time frame

Front 51

what is the most common multiplier

Back 51

1.5