Chapter-11
Equal for the sum of consumer spending
AE(planned) = C + I(planned)
aggregate consumption function on graph
Downward Shift of the Aggregate Consumption Function: The effect of a reduction in expected future disposable income. Consumers will spend less at every given level of current disposable income, YD.
The national income accounting equations
GDP = C + I YD = GDP
MPC formula
MPC = delta Consumer Spending / delta Disposable income
Inventories
are stocks of goods held to satisfy future sales.
consumption function
c = a + MPC *yd *note: yd is the current household disposable income, and a is current household autonomous spending
Planned investment spending depends on negative
depends negatively on: interest rate, existing production capacity, existing inventories
Planned investment spending depends on positive
depends positively on: the expected growth rate of real GDP. unexpected high sales that reduce inventories
accelerator principle
higher rate of growth in real GDP leads to higher planned investment spending, and a lower growth rate of real GDP leads to lower planned investment spending.
paradox of thrift
households and producers cut their spending in anticipation of future tough economic times
autonomous change in aggregate spending
is a change in the desired level of spending by firms, households, or government for a given level of GDP.
The marginal propensity to consume, or MPC
is the increase in consumer spending when disposable income rises by $1.
Planned investment spending
is the investment spending that businesses plan to undertake during a given period.
Income-expenditure equilibrium GDP
is the level of real GDP at which real GDP equals planned aggregate spending.
Planned aggregate spending
is the total amount of planned spending in the economy.
Unplanned inventory investment
occurs when actual sales are more (or less) than businesses expected, leading to unplanned investment in inventories (can be negative).
The consumption function
relates a household's current disposable income to its consumer spending
aggregate consumption function
the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending.
Inventory investment
the value of the change in total inventories held in the economy during a given period.
income-expenditure equilibrium
when aggregate output, measured by real GDP, is equal to planned aggregate spending