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 ___.