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15 Cards in this Set
- Front
- Back
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Define aggregate expenditure (ae)?
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the total amount of spending in the economy: the sum of consumption, planned investment, government purchases and net exports.
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What is the aggregate expenditure model?
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A macroeconomic model that focuses on the relationship between total spending and real GDP
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AE=?
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AE=C+I+G+NX
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What is the macroeconomic equilibrium?
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AE=GDP
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If aggregate expenditure is equal to GDP then ...
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inventories are unchanged and the economy is in macroeconomic equilibrium
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If aggregate expenditure is less than GDP then ...
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inventories rise and GDP and employment decreases
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If aggregate expenditure is greater than GDP then ...
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inventories fall and GDP and employment increase
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What are the five most important variables that determine the level of consumption?
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1. current disposable income
2. household wealth 3. expected future income 4. the price level 5. the interest rate |
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Define disposable income?
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the income remaining to households after they have paid the personal income tax and received transfer payments
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Define consumption function?
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the relationship between consumption spending and disposable income.
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Define Marginal propensity to consume (MPC)?
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The slope of the consumption function: the amount by which consumption spending increases when disposable income increases.
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MPC =
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Change in consumption / change in income
or deltaC/deltaYD |
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changeofY =
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changeofC + changeofS + changeofT
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Define marginal propensity to save (MPS)?
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the change in saving divided by the change in income
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MPS =
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change in saving /
change in income |
