slides econ chapter 11

inventories

stocks of goods held to satisfy future sales

marginal propensity to save

the fraction of an additional dollar of disposable income that is saved; MPS = 1 - MPC

planned investment spending

the investment spending that businesses intend to undertake during a given period

paradox of thrift

the outcome of many individual actions can generate a result that is different from and worse than the simple sum of those individual actions

aggregate consumption function

the relationship for the economy as a whole between aggregate disposable income and aggregate consumer spending. C = A + MPC * YD

actual investment spending

the sum of planned investment spending and unplanned inventory investment

inventory investment

the value of the change in total inventories held in the economy during a given period

unplanned inventory investment

unplanned changes in inventories occurring when actual sales are more or less than businesses expected

MPC * $1

when yd goes up by $1, co goes up by?

current disposable income

income after taxes are paid and government transfers are received. 2013: average household disposable income = $45,826 and average household consumer spending = $42,495

Keynesian cross

is a diagram that identifies income-expenditure equilibrium as the point where a planned aggregate spending line crosses the 45-degree line.

multiplier effect

(1/1 - MPC) * (how much investment spending rises) is equal to total increase in real GDP

what drives planned investment spending?

1. the interest rate (when interests rates are low more loans are undertaken and investment rises) 2. expected future real GDP 3. current level of production capacity (if your firm has extra capacity and doesn't expect sales to increase, its investment will be lower)

shifts of aggregate consumption function

Changes in expected future disposable income and changes in aggregate wealth

income-expenditure equilibrium

GDP = C + I or GDP = AE planned + I unplanned Whenever real GDP exceeds AE planned, I unplanned is positive Whenever real GDP is less than Ae planned, I unplanned is negative.

accelerator principle

a higher rate of growth in real GDP leads to high planned investment spending. a lower growth rate of real GDP leads to lower planned investment spending

consumption function

an equation showing how an individual household's consumer spending varies with the household's disposable income. c = a + MPC * yd where: c = a household's consumer spending yd = household disposable income MPC = marginal propensity to consume a = a constant, autonomous consumer spending (what a family would spend even with zero income. this is household spending based on savings and borrowing.

C = 5,000 + 0.7 YD

assume aggregate consumer spending equals $5,000 when aggregate disposable income is zero, and when disposable income increases from $300 to $400, consumer spending increases by $70. What is the equation for the aggregate consumption function?

marginal propensity to consumer

change in consumer spending / change in disposable income

shifts of the planned aggregate spending line

change in interest rate and change in wealth

multiplier

change in real GDP / autonomous change in aggregate spending = (1/ 1 - MPC)

smaller the value of the multiplier

holding everything else constant in an economy, the larger the MPS, the:

unplanned increases in inventories are occurring

suppose the level of planned aggregate expenditure in an economy is $500 and real GDP is $600. According to our model:

2,000; 0.4

suppose when sue's disposable income is $10,000, she spends $8,000, and when her disposable income is $20,000, she spends $14,000. Sue's autonomous consumer spending is equal to ___ and her MPS is equal to ___.