Chapter-11

Equal for the sum of consumer spending

AE(planned) = C + I(planned)

aggregate consumption function on graph

Downward Shift of the Aggregate Consumption Function: The effect of a reduction in expected future disposable income. Consumers will spend less at every given level of current disposable income, YD.

The national income accounting equations

GDP = C + I YD = GDP

MPC formula

MPC = delta Consumer Spending / delta Disposable income

Inventories

are stocks of goods held to satisfy future sales.

consumption function

c = a + MPC *yd *note: yd is the current household disposable income, and a is current household autonomous spending

Planned investment spending depends on negative

depends negatively on: interest rate, existing production capacity, existing inventories

Planned investment spending depends on positive

depends positively on: the expected growth rate of real GDP. unexpected high sales that reduce inventories

accelerator principle

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

paradox of thrift

households and producers cut their spending in anticipation of future tough economic times

autonomous change in aggregate spending

is a change in the desired level of spending by firms, households, or government for a given level of GDP.

The marginal propensity to consume, or MPC

is the increase in consumer spending when disposable income rises by $1.

Planned investment spending

is the investment spending that businesses plan to undertake during a given period.

Income-expenditure equilibrium GDP

is the level of real GDP at which real GDP equals planned aggregate spending.

Planned aggregate spending

is the total amount of planned spending in the economy.

Unplanned inventory investment

occurs when actual sales are more (or less) than businesses expected, leading to unplanned investment in inventories (can be negative).

The consumption function

relates a household's current disposable income to its consumer spending

aggregate consumption function

the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending.

Inventory investment

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

income-expenditure equilibrium

when aggregate output, measured by real GDP, is equal to planned aggregate spending