Aggregate Expenditures Model

Savings Schedule

A schedule showing the amounts households plan to save at different levels of disposable income

Tax multiplier

-MPC/(1-MPC)

Expenditures Multiplier

1/(1-MPC)

Equilibrium Dynamics

If investment increases equilibrium dynamics increases and our GDP increases

Government Purchases schedule

The gov purchases schedule is a constant horizontal line -Adding gov purchases to Agg Ex Model will shift line to the left

Investment Schedule

The investment schedule is a constant horizontal line -Adding investment to Agg Ex Model will shift line to the left

Keynesian economics

Theory based on the principles of John Maynard Keynes, stating that government spending should increase during business slumps and be curbed during booms.

Disposable income

income - taxes -is the amount on your paycheck

Investment Demand Curve

• Downward sloping curve that shows the relationship between Interest and interest rate • As interest rate decrease, the quantity investment increases • The same is true for the entire economy • High interest rates make new capital more expensive - Capital is closely linked with growth

Inflationary Gay

• The difference, or gap, between expenditure when real GDP is above the full- employment level and the level of expenditure at full-employment real GDP

Recessionary Gap

• The difference, or gap, between expenditure when real GDP is below the full-employment level and the level of expenditure at full- employment real GDP

Expected rate of return

An anticipated increase in profit resulting from additional investment; expressed as a percentage of the monetary cost of the additional investment Firms will invest when the expected rate of return is >= real interest rate

The multiplier effect

An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.

Aggregate Expenditures Model

Model that relates aggregate expenditures to the level of real GDP.

Net Exports Schedule

The NX schedule is a constant horizontal line -Adding NX to Agg Ex Model will shift line to the left

Math behind the aggregate expenditures model

Y= (1/(1-MPC))(A+I+G+NX)+(-MPC/(1-MPC))T

Consumption Schedule

a schedule showing the amounts households plan to spend for consumer goods at different levels of disposable income

Agg Exp model -Change in expenditures math

change in Y = multiplier x change in expenditures

Agg Ex Model - Change in tax

change in Y = multiplier x change in tax