Ch 10

Flow of expenditures equals

Flow of income (production)

Real business cycle theory

Fluctuations in the economy reflect real phenomena — simultaneous shifts in supply and demand not simply supply responses to demand shifts

The multiplier model is a ___

Historical model

The SAS curve is ___ b/c mult. Model assumes the price level remains ___

Horizontal, constant

When all individuals spend their income the aggregate economy is ____

In equilibrium

In the multiplier model, focus on the 4 categories of spending and how they're affected by __

Income

Multiplier equation

Income equals multiplier times autonomous expenditures (Y = mult x AE)

Wothdrawals

Income not spent on domestic goods

Other important factors to spending as income increases

Income tax (as income rises, pay more in tax), lowers how much additional money people actually have to consume

As mpe gets larger

Induced effects of of initial shift of income get larger

Multiplier model was designed to show how an ___

Initial drop in investment could lead to such a large drop in income

As businesses slow production the economy moves ___ along the aggregate production curve

Inward (in this case production exceeded equilibrium)

Rational expectations model

all decisions are based on the expected equilibrium in the economy

Induced expenditures

expenditures that change as income changes

Autonomous expenditures

expenditures that do not systematically vary with income

Aggregate production

the total amount of final goods and services produced in every industry in an economy

You can use the aggregate production curve and aggregate expenditures curve to determine

Level of income in which economy will be in equilibrium

Equilibrium level of income

Level of income which neither producers or consumers have any reason to change what they are doing

Most important part of MPE is the ___

Marginal propensity to consume

Induced expenditures are determined by

Marginal propensity to consume, import and taxes that vary with income

The slope of the AE curve is equal to the

Marginal propensity to expand (mpe)

An increase in imports decreases

Marginal propensity to expend (net exports number decreases in the CIG(X-M))

expenditures multiplier

Multiplier = 1 / (1 - mpe) ; a number that tells us how much income will change in response to a change in AE

As mpe increases ____

Multiplier increases

In equilibrium planned expenditures must equal ___

Production

Multiplier model tells us about a shifts ___ effects

Quantitative

Marginal propensity to expand

Ratio of agg expenditures to a change in income (slope of the mpe line)

The multiplier equation calculates the ___

Shift

If autonomous expenditures change AE curve ___

Shifts up/down

MPE is assumed to be greater than ___ and less than ____

0, 1 (AE curve will then be less than 45*)

Agg. Expenditures and income can be shown using

AE curve

Actual income =

Actual production (terms can be used interchangeably)

AE = AE0 + mpeY

Aggregate expenditure formula

The multiplier model explores what happens when ___

Aggregate expenditures expand by a certain number

Initial Changes in Autonomous expenditures are ___ in the multiplier process

Amplified

AE0 = C0 + I0 + G0 + (X-M)0

Autonomous expenditures formula

2 types of expenditures in the multiplier model

Autonomous, induced

The larger the mpe the more steps required before the shifts ___

Become small

Aggregate expenditures has 4 main classificatuons

C + I + G + (X-M)

Aggregate production is at the ___ of the multiplier model

Center

Marginal Propensity to Consume (MPC)

Change in consumption that occurs with a change in income

Marginal propensity to import

Changes in imports related to changes in income

Multiplier model allows policy makers to predict effects of shifts in autonomous expenditures and allows them to control it with ___

Countershifts of their own. Implement policies affecting autonomous spending to shift AE curve and obtain desired level of output

Multiplier equation gives you a simple way to ___

Determine equilibrium income in the multiplier model

Aggregate Expenditure

Total amount of spending on final goods and services in the economy

Disequilibrium

When aggregate production does not equal aggregate expenditures

Estimating aggregate expenditures is fund at mental to predicting

Whether the economy will grow or fall into a recession

Aggregate production curve

X = real income y = real production, curve = 45* line