Aggregate Expenditures Model
In an economy where all spending is done by households and individuals, in equilibrium,
Consumption=disposable income and savings=0
investment schedule
In the aggregate expenditures model, a horizontal line showing the relationship between gross investment ( I) and the level of real GDP(Y) in the economy
interest rate
Payment made for the use of money, expressed as a percentage of the amount borrowed. nominal interest rate
Marginal Benefit (MB)
The additional benefit received from the consumption of the next unit of a good or service
Marginal Cost (MC)
The additional cost incurred from the consumption of the next unit of a good or service
multiplier effect
The concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP
gross investment
The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a fixed time period Business fixed residential inventory
expenditures multiplier
The effect that a $1 change in expenditure has on real GDP; calculated as the ratio of the total change in real GDP due to a change in initial expenditure.
Tax Multiplier
The effect that a $1 change in taxes has on real GDP; in the aggregate expenditures model, calculated as the change in output divided by an initial change in taxes
Optimization
The idea that people make choices in order to maximize the overall benefit, or utility, of an action subject to its cost; people will engage in an activity as long as the marginal benefit of an activity is greater than or equal to its marginal cost.
decreasing marginal benefit
The negative relationship between the marginal benefit associated with the use of a good or service and the quantity consumed; the more of a good or service that is consumed, in a given period of time, the lower the marginal benefit associated with each additional unit.
investment demand
The negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate
increasing marginal cost
The positive relationship between the marginal cost associated with the use of a good or service and the quantity produced; the more of a good or service that is produced, in a given period of time, the higher the marginal cost associated with each additional unit.
marginal decision making
The process of making choices in increments by evaluating the additional, or marginal, benefit against the additional, or marginal, cost of an action.
Aggregate Expenditure
The sum of all expenditures made in an economy on consumption, gross investment, government purchases, and net exports. In equilibrium AE=income or real gap
consumption schedule
a graph showing the relationship between income and consumption
Savings Schedule
a graph showing the relationship between income and savings
Real GDP (Y)
a measure of the constant dollar value of all final goods produced in a country during a fixed period of time sometimes called Inflation adjusted GDP. In equilibrium real gdp=income
Aggregate Expenditure Model
a model developed by John Maynard Keynes that relates income and expenditures in an economy such that in equilibrium total expenditures in the economy will be equal to total output
consumption
all expenditures made by households on goods like clothing, foods, electronics and recreation during a given time period
government purchases
all final goods purchased such as office supplies tanks teachers airport security
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
Net Exports (NX)
difference between exports and imports
capital goods
durable long lasting goods that are used to produce other goods.
The opportunity cost of investment
equals the cost that the firm pays, if it borrows money, to make the purchase
When aggregate expenditures by the amount of gross investment
equilibrium real GDP increases
The aggregate expenditures model shifts vertically by an amount equal to gross investment
if gross investment increase
Government purchases schedule
in the aggregate expenditures model, a horizontal line showing the relationship between government purchases (G) and the level of real GDP (Y) in the economy
Net Exports Schedule
in the aggregate expenditures model, a horizontal line showing the relationship between net exports (NX) and the level of real GDP (Y) in the economy
equilibrium line
in the aggregate expenditures model, the 45-degree line through the origin that represents all points at which aggregate expenditure (AE) is equal to output, or real GDP (Y)
The expected rate of return
is the additional profit the firm expects to earn for each dollar of physical capital purchased, expressed as a percentage
Investment demand downward slopes when
quantity of investment demanded increases as interest rates fall
Disposable Income (DI)
the amount of income available to save or spend after taxes have been paid. calculated as Income Y minus taxes. DI=Y-T
recessionary gap
the difference between expenditure when gdp is below the full employment level
Marginal Propensity to Consume (MPC)
the fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income
Marginal Propensity to Consume (MPC)
the fraction of each additional dollar of disposable income spent on consumption
Marginal Propensity to Save (MPS)
the fraction of each additional dollar of income that is saved
real interest rate
the interest rate paid to lenders and savers when the expected rate of inflation equals 0. the inflation adjusted return= the nominal interest rate-inflation rate
autonomous consumption
the level of consumption expenditure when income=0. funded by drawing on savings or borrowing
Traditional models of labor markets implied that if unemployment was very high
there was a surplus of labor and overtime wages would fall making firms more willing to hire the unemployed
If the output is lower than the full employment level expenditures
too low