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