ap macro unit 3
If there was a change in investment spending of $10 and the MPS was .25, then real GDP would increase by
$40
Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is .8. Assuming no taxes and no trade, by how much will real GDP change?
$500 billion
Suppose the marginal propensity to consume is equal to .9 and investment spending increases by $50 billion. assuming no taxes and no trade, by how much will real GDP change?
$500 billion increase
Wealth Effect
The change in consumer spending caused by the altered purchasing power of consumers assets.
The marginal propensity to save is
The fraction of an additional dollar of disposable income that is saved (marginal)
The MPC plus the MPS must
equal 1
The MPS plus the MPC must equal
one
aggregate supply is what
relationship between the aggregate price level and quantity of aggregate output supplied in economy
Define Long Run Aggregate Supply
relationship of agg price and quantity if all prices were fully flexible (wages)
As the disposable income of the economy increases
the APC falls ad the APS rises
The marginal propensity to consume is
the change in consumer spending divided by the change in aggregate disposable income
The marginal propensity to consume is equal to
the change in consumer spending divided by the change in aggregate disposable income
If the multiplier equals 4, then the marginal propensity to save must be equal to
1/4
The multiplier is equal to
1/[1-MPC]
If MPC = .9, the multiplier is
10
if the MPS = .1, then the value of the multiplier equals
10
If the marginal propensity to save is .3, the size of the multiplier is
3.3
suppose investment spending increases by $50 billion, and as a result the equilibrium income increases by $200 billion. The multiplier is:
4
If the MPC is .8 then the multiplier is
5
multiplier
1/(1-MPC) or 1/MPS
increase in GDP
1/(1-MPC) xaggregate spending
Interest Rate Effect
(think of super bowl tickets and preseason tickets) a rise in aggregate price level depresses investment and consumer spending through purchases and money holdings
If the multiplier is 4, and investment spending falls by $100 billion, the change in equilibrium income will by
-$400 billion
if your disposable income increases from 10,000 to 15,000 and your consumption increases from 9,000 to 12,000 your MPC is
.6
Suppose investment spending increases by $50 billion, and as a result the equilibrium income increases by $200 billion. The value of the MPS is:
.75
if disposable income increases by $5 billion and consumer spending increases by 4 billion the marginal propensity to consume is equal to
.8
slope of the consumption schedule or line for a given economy is the
MPC
MPC
MPC = change in consumer spending over disposable income
MPS
MPS = 1 - MPC
two states of the LRAS
actual output and potential output
Why does price level have no effect on the quantity of aggregate output supplied?
because changes in aggregate price has no effect and actual and potential output cancels each other out
examples of changes in aggregate wealth?
booming stock market and fall of housing prices
The MPC is the
change in consumption divided by the change in disposable income
factors that shift AGGREGATE SUPPLY curve (3)
changes in commodity prices changes in nominal wages changes in productivity
Factors of the Aggregate Demand Curve (shifting) (5)
changes in expectations changes in wealth (value of household assets) stock (inventory) fiscal policy (taxes or spending) monetary policy (quantity of money in circulation)
The marginal propensity to consume is equal to the change in
consumer spending divided by the change in disposable income
Factors of LRAS (3)
increases in quantity of resources increase in quality of resources technological progress
an increase in the MPC
increases the multiplier
the greater the MPC the greater the multiplier
true
largest inflexible production cost?
wages
other things being equal, when will firms undertake more investment spending?
when they expect things to grow (inventory, consumer business sentiment)
