Aggregate expenditures model
in the early 1930's, the economic engine of the United States sputtered to a halt and unemployment rates reached a high of ___ percent in 1933.
25
the equilibrium line is sometimes called the
45-degree line
Formula for consumption
A + MPC x (Y - T)
Marginal Propensity to Consume (MPC)
(ΔConsumption) / (ΔDisposable Income)
The two variables that affect investment are the
- opportunity cost of the investment. - expected rate of return.
Tax multiplier
-MPC/(1-MPC)
in an economy where all spending is done by households and individuals, in equilibrium ___ equals disposable income, and ___ equals zero
-consumption -saving
___ is always equal to ___, so we use the abbreviation Y for both
-output (real gdp) -income
you can measure the size of an economy by measuring
-the value of all final goods and services that are produced -the total income -how much gets spent on buying the goods and services
when graphing the savings schedule, place savings on the ___ axis and disposable income on the ___ axis
-vertical -horizontal
as disposable income rises, so does consumption, but not by the full amount, because the marginal propensity to consume is less than ___
1
Assuming taxes are zero, the equilibrium consumption and disposable income occur where the consumption schedule crosses the ___ line
equilibrium
When aggregate expenditures increase by the amount of government purchases
equilibrium real gdp increases
In aggregate expenditures model, output, or real gdp is driven by
expenditures
The ___ multiplier is used to calculate a change in real gdp whenever expenditures such as consumption, gross investment, government purchases, or net exports change
expenditures
a change in real GDP equals the ___ multiplier times the initial change in expenditures
expenditures
The larger the expenditures multiplier the ___ the swings in output tend to be
greater
when aggregate expenditures increase, the change in equilibrium real gdp is
greater than the change in aggregate expenditures
Investment schedule is
horizontal
the equilibrium of the aggregate expenditures model is Aggregate Expenditures = ___
income
during the great depression Keynes argued that if expenditures fell, factories would produce ___ output
less
If output is lower than the full-employment level, expenditures are too
low
The fraction of each additional dollar of income that is spent on consumption.
marginal propensity to consume (MPC)
The fraction of each additional dollar of income that is saved.
marginal propensity to save (MPS)
the difference between expenditures at the full-employment level of output and expenditures when output is ___ than the full-employment level is called inflationary gap
more
The opportunity cost of the investment is the ___ interest rate
real
When using the aggregate expenditures model, if expenditures change
the model will move to a new equilibrium
in the aggregate expenditures model because taxes are assumed to be a lump sum and independent of income, when real gdp changes, disposable income changes by
the same amount
If gross investment increases, it will shift the aggregate expenditures schedule ___ , by an amount equal to the gross investment
vertically
adding the given level of government purchases to consumption shifts the aggregate expenditure schedule
vertically, by an amount equal to government purchases
the slope of the savings schedule equals:
ΔSavings/ΔDisposable Income
The equilibrium condition of the aggregate expenditure model is
AE=Y Y=C + I + G +NX
Aggregate expenditure
C + I + G + NX
when there are taxes the initial change in consumption will equal the
MPC times the change in disposable income due to taxes
Aggregate expenditures model equilibrium
[(1/1-mpc)]x(a+ c + i + g + nx)+[(-mpc/1-mpc) x t
the expenditures multiplier is used to calculate
a change in real gdp whenever expenditures such as consumption, gross investment, government purchases, or net exports change
If gross investment increases, it will shift the ___ vertically by an amount equal to gross investment
aggregate expenditures schedule
The equilibrium level of real gdp is found at the intersection of the
aggregate expenditures schedule and the equilibrium line
the level of consumption that is associated with zero income is called ___ consumption
autonomous
Consumption equals
autonomous expenditure plus the marginal propensity to consume times income minus taxes
tax multiplier
change in real gdp/change in taxes
Investment demand is
downsloping