Chapter 28
autonomous expenditure
The sum of investment, government expenditure, and exports, which does not vary with real GDP; Autonomous expenditure equals the sum of investment, government expenditure, exports, and the autonomous parts of consumption expenditure and imports.
Aggregate planned expenditure
The sum of planned consumption expenditure, planned investment, planned government expenditure on goods and services, and planned exports minus planned imports.
induced expenditure
The sum of the components that vary with real GDP—consumption expenditure minus imports; induced expenditure equals consumption expenditure minus imports
Marginal Prosperity to Import (MPI)
is the fraction of an increase in real GDP that is spent on imports. It is calculated as the change in imports divided by the change in real GDP, other things remaining the same
aggregate expenditure schedule
lists aggregate planned expenditure generated at each level of real GDP
When the price level changes
a wealth effect and substitution effects change aggregate planned expenditure and change the quantity of real GDP demanded
At points above the 45 degree line in the AE model:
aggregate planned expenditure is greater than GDP.
Fluctuations in total spending in the economy may affect:
both employment and production in the short run.
45 line
consumption equals disposable income any where along the line.
Aggregate expenditure, or the total amount of spending in the economy, equals:
consumption spending plus planned investment spending plus government purchases plus net exports.
The most important determinant of consumption is __________.
current disposable income
When aggregate planned expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.
fall, increase
Marginal Prosperity to Consume (MPC)
he fraction of a change in disposable income that is spent on consumption. It is calculated as the change in consumption expenditure divided by the change in disposable income
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals:
one
When real GDP increases:
planned consumption expenditure and planned imports increase
The aggregate expenditure model focuses on the relationship between aggregate planned expenditure and __________.
real GDP
When aggregate planned expenditures are less than the real GDP, inventories will:
rise
When consumption expenditure exceeds disposable income:
saving is negative (dissaving)
Multiplier
the amount by which a change in autonomous expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP.
Equilibrium expenditure
the level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP
The amount by which consumption spending increases when disposable income increases is called __________.
the marginal propensity to consume
An increase in __________ will cause savings to increase.
interest rates
aggregate expenditure curve
is a graph of the aggregate expenditure schedule
autonomous consumption
is the amount of consumption expenditure that would take place in the short run even if people had no current income
induced consumption
is the consumption expenditure that is induced by an increase in disposable income
Marginal Propensity to Save (MPS)
is the fraction of a change in disposable income that is saved. It is calculated as the change in saving (ΔS) divided by the change in disposable income (ΔYD)
If real GDP exceeds aggregate planned expenditure:
there is an unplanned increase in inventories
Actual investment will equal planned investment only when __________.
there is no unplanned change in inventory
When consumption expenditure is less than disposable income:
there is saving
If you divide both sides of ΔS + ΔC by ΔYD, you get 1.
ΔC/ΔYD + ΔS/ΔYD = 1
Savings plus consumption expenditure equals disposable income:
ΔS + ΔC = ΔYD
The change in real GDP equation
ΔY = ΔN + ΔA, where Y is real GDP, N is induced expenditure, and A is autonomous expenditure
ΔC/ΔYD is the marginal propensity to consume (MPC), and ΔS/ΔYD is the marginal propensity to save (MPS), so
MPC + MPS = 1
Marginal Prosperity to Consume (MPC) equation
MPC = ΔC/ΔYD, where ΔC is consumption expenditure and ΔYD is disposable income
The value of the multiplier is larger when the value of the __________.
MPC is larger
Marginal Propensity to Save (MPS) equation
MPS = ΔS/ΔYD, where ΔS is savings and ΔYD is disposable income
The slope of the AE curve equals the marginal propensity to consume (MPC)
Multiplier = 1 / 1 - MPC but (1 - MPC) = MPS Multiplier = 1 / MPS
Multiplier equation
Multiplier = Change in equilibrium expenditure/Change in autonomous expenditure
induced expenditure equation
N = ΔC - ΔM, where N is induced expenditure, C is consumption expenditure and M is imports
Actual aggregate expenditure is always equal to
Real GDP
Slope of AE; aggregate planned expenditure
Slope of AE curve = ΔN ÷ ΔY So, ΔN = Slope of AE curve x ΔY
consumption function
The relationship between consumption expenditure and disposable income, other things remaining the same
Saving Function
The relationship between saving and disposable income, other things remaining the same
The Size of the Multiplier
The size of the multiplier is the change in equilibrium expenditure divided by the change in autonomous expenditure.
If the MPC is 0.8, then a $100 million increase in government expenditures will increase equilibrium GDP by __________.
$500 million
If the marginal propensity to save (MPS) is 0.2, how much additional consumption will result from an increase of $100 billion in disposable income?
$80 billion
If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion in disposable income?
$90 billion
Two-Way Link Between Aggregate Expenditure and Real GDP Other things remaining the same:
- An increase in real GDP increases aggregate expenditure. - An increase in aggregate expenditure increases real GDP.
What happens when there is an unplanned decrease in inventories?
Actual investment is less than planned investment.
mulitplier effect
An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.
Which of these statements about autonomous expenditure is correct? - Autonomous expenditure does not depend on the level of GDP. - Autonomous expenditure depends on the level of GDP. - No part of consumption is autonomous.
Autonomous expenditure does not depend on the level of GDP.
Why Is the Multiplier Greater than 1?
The multiplier is greater than 1 because an increase in autonomous expenditure induces further increases in aggregate expenditure.
Business Cycle Turning Points
Turning points in the business cycle—peaks and troughs—occur when autonomous expenditure changes. - An increase in autonomous expenditure brings an unplanned decrease in inventories, which triggers an expansion. - A decrease in autonomous expenditure brings an unplanned increase in inventories, which triggers a recession.
When incomes rise faster in the United States than in other countries:
U.S. net exports will fall.
disposable income equation
YD = Y - T, where Y is real GDP and T is net taxes
An increase in household wealth will:
increase the consumption component of aggregate expenditure