CH12
AGGREGATE EXPENDITURE MODEL
focuses on the relationship between TOTAL SPENDING and REAL GDP in the short run, assuming PRICE LEVEL is constant
INVENTORY
goods that have been produced but not yet sold
CONSUMPTION SPENDING
household spending on goods and services
AGGREGATE DEMAND CURVE
illustrates the relationship between PRICE LEVEL and the QUANTITY OF PLANNED AGGREGATE EXPENDITURE, holding constant all other factors that affect aggregate expenditure
Key idea in the aggregate expenditure model
in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure
A decrease in the real interest rate will:
increase consumer's purchases of durable goods
MARGINAL PROPENSITY TO SAVE
the change in saving / change in disposable income
MULTIPLIER
the ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure
General formula for the Multiplier
1 / MPS
MPC + MPS =
1
An increase in aggregate expenditure has what result on equilibrium GDP?
GDP rises
An unplanned increase in inventories results in:
actual investment is greater than planned investment
If inventories decline by more than analysts predict they will decline, this implies that:
actual investment spending is less than planned investment spending
An unplanned decrease in inventories occurs when:
aggregate expenditure is greater than GDP
How does an increase in price level affect consumption spending?
an increase in price level lowers real wealth, causing consumption to decrease
Why do decreases in price level result in a rise in aggregate expenditure?
causes firms and consumers to hold less money, which lowers interest rate. Lower interest rates raise consumption and planned investment expenditures
Why do increases in price level result in a decline in aggregate expenditure?
causes firms and consumers to hold more money, which raises interest rate. Higher interest rates lower consumption and planned investment expenditures
What impact does an increase in price level in the US have on net exports and why?
decreases net exports by increasing the relative cost of American goods
CONSUMPTION FUNCTION
describes the relationship between consumption spending and disposable income
What impact does a decrease in price level in the US have on net exports and why?
increases net exports by reducing the relative cost of American goods
An increase in price level in the US will have what effect on the aggregate expenditure line?
line will shift downward
A decrease in price level in the US will have what effect on the aggregate expenditure line?
line will shift upward
Increases in the price level will:
lower consumption because real wealth decreases
When aggregate expenditure = GDP,
macroeconomic equilibrium occurs
When total spending = total production,
macroeconomic equilibrium occurs