Aggregate expenditures model

in the early 1930's, the economic engine of the United States sputtered to a halt and unemployment rates reached a high of ___ percent in 1933.

25

the equilibrium line is sometimes called the

45-degree line

Formula for consumption

A + MPC x (Y - T)

Marginal Propensity to Consume (MPC)

(ΔConsumption) / (ΔDisposable Income)

The two variables that affect investment are the

- opportunity cost of the investment. - expected rate of return.

Tax multiplier

-MPC/(1-MPC)

in an economy where all spending is done by households and individuals, in equilibrium ___ equals disposable income, and ___ equals zero

-consumption -saving

___ is always equal to ___, so we use the abbreviation Y for both

-output (real gdp) -income

you can measure the size of an economy by measuring

-the value of all final goods and services that are produced -the total income -how much gets spent on buying the goods and services

when graphing the savings schedule, place savings on the ___ axis and disposable income on the ___ axis

-vertical -horizontal

as disposable income rises, so does consumption, but not by the full amount, because the marginal propensity to consume is less than ___

1

Assuming taxes are zero, the equilibrium consumption and disposable income occur where the consumption schedule crosses the ___ line

equilibrium

When aggregate expenditures increase by the amount of government purchases

equilibrium real gdp increases

In aggregate expenditures model, output, or real gdp is driven by

expenditures

The ___ multiplier is used to calculate a change in real gdp whenever expenditures such as consumption, gross investment, government purchases, or net exports change

expenditures

a change in real GDP equals the ___ multiplier times the initial change in expenditures

expenditures

The larger the expenditures multiplier the ___ the swings in output tend to be

greater

when aggregate expenditures increase, the change in equilibrium real gdp is

greater than the change in aggregate expenditures

Investment schedule is

horizontal

the equilibrium of the aggregate expenditures model is Aggregate Expenditures = ___

income

during the great depression Keynes argued that if expenditures fell, factories would produce ___ output

less

If output is lower than the full-employment level, expenditures are too

low

The fraction of each additional dollar of income that is spent on consumption.

marginal propensity to consume (MPC)

The fraction of each additional dollar of income that is saved.

marginal propensity to save (MPS)

the difference between expenditures at the full-employment level of output and expenditures when output is ___ than the full-employment level is called inflationary gap

more

The opportunity cost of the investment is the ___ interest rate

real

When using the aggregate expenditures model, if expenditures change

the model will move to a new equilibrium

in the aggregate expenditures model because taxes are assumed to be a lump sum and independent of income, when real gdp changes, disposable income changes by

the same amount

If gross investment increases, it will shift the aggregate expenditures schedule ___ , by an amount equal to the gross investment

vertically

adding the given level of government purchases to consumption shifts the aggregate expenditure schedule

vertically, by an amount equal to government purchases

the slope of the savings schedule equals:

ΔSavings/ΔDisposable Income

The equilibrium condition of the aggregate expenditure model is

AE=Y Y=C + I + G +NX

Aggregate expenditure

C + I + G + NX

when there are taxes the initial change in consumption will equal the

MPC times the change in disposable income due to taxes

Aggregate expenditures model equilibrium

[(1/1-mpc)]x(a+ c + i + g + nx)+[(-mpc/1-mpc) x t

the expenditures multiplier is used to calculate

a change in real gdp whenever expenditures such as consumption, gross investment, government purchases, or net exports change

If gross investment increases, it will shift the ___ vertically by an amount equal to gross investment

aggregate expenditures schedule

The equilibrium level of real gdp is found at the intersection of the

aggregate expenditures schedule and the equilibrium line

the level of consumption that is associated with zero income is called ___ consumption

autonomous

Consumption equals

autonomous expenditure plus the marginal propensity to consume times income minus taxes

tax multiplier

change in real gdp/change in taxes

Investment demand is

downsloping