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51 Cards in this Set
- Front
- Back
"in the short run, spending depends on...
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income and income depends on spending"
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d: short run macro model
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macroeconomic model that explains how changes in spending can affect real GDP in the short run
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determinants of consumption spending
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1) disposable income
2) wealth 3) interest rate 4) expectations |
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disposable income formula
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disposable income = income - net taxes
net taxes = taxes- transfers |
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d: wealth
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total value of household assets (home, stock, bonds, bank accounts) minus outstanding liabilities (student loans, mortgage loans, credit card debt)
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what will a rise in wealth cause
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an increase in consumption spending
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what will a rise in the interest rate cause
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decrease in consumption spending
increase in savings decrease in planned investment |
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how do expectations about the future influence consumption spending
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if you are more optimistic about the future, you are likely to spend more of your income now
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what does optimism about the future cause
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causes an increase in consumption spending
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what other things can influence consumption spending
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inheritances, how long you expect to live
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consumption spending increases when
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interest rate falls
disposable income rises wealth rises optimistic about the future |
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what is the most important and stable factor that influences consumption spending
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disposable income
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d: consumption function
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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
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how much we would spend if the disposable income were zero
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what provides an increase in autonomous consumption spending
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increase in wealth
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what is the slope of the consumption function
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the marginal propensity to consume
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formula for MPC
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Δconsumption / Δdisposable income
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d: marginal propensity to consume
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the amount by which consumption spending rises when disposable income rises by a dollar. for each dollar how much you are willing to spend
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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) |
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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)) |
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what causes a shift of the consumption income line
(but doesnt work solely on autonomous consumption) |
a decrease in taxes
(increases disposable income at each income level) |
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what causes a shift of the consumption income line because of a shift of autonomous consumption
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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...
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total exports - total imports
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d: aggregate expenditure
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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 |
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what is the formula for aggregate expenditure
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AE= C +Ip + G+ NX
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when income increases, aggregate expenditure will rise by...
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ΔAE = ΔGDP X MPC
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firms are producing more than they are selling
output will decline stop hiring workers inventories are rising |
GDP> AE
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firms are selling more than they are producing
output will increase hire more workers the extra goods come from inventories |
GDP < AE
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equilibrium
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GDP = AE
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the change in inventories at any given time will always equal
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GDP - AE
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what is another way to find GDP equilibrium (other than finding when GDP = AE)
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find when the inventories are equal to zero
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what does the 45 degree line allow us to do
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see the equilibrium of the consumption function graphically
where the 45 degree line crosses the consumption-income line is the equilibrium |
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in the short run macro model what is cyclical unemployment caused by
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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
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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
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change in output
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multiplier formula
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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
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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 |
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how are taxes/transfers an automatic stabilizer
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as income rises, you pay out more taxes and receive less transfer payments
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what do automatic destablizers do
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work with the multiplier to make spending changes larger
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in the short run, automatic destabizers make the economy _____
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less stable
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what are 2 examples of automatic destablizers
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1) asset prices, wealth and consumption
2) output and investment spending |
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how are asset prices, wealth, and consumption automatic destablizers of the multiplier process
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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
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how is investment spending an automatic destablizer
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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 |
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how long does it take the mulitplier to work its way through the economy
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9 months to a year
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what are some conditions that must be looked at when considering the real world multiplier
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country
economic conditions type and size of spending time frame |
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what is the most common multiplier
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1.5
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