Studied by 2 peopleWhat is disposable income?
income after taxes
Average Propensity to Consume (APC)
Fraction (or percentage) of disposable income that households plan to spend for consumer goods and services; c/disposable income
Average Propensity to Save (APS)
Fraction (or percentage) of disposable income that households save; s/disposable income
Marginal Propensity to Consume (MPC)
amount that is consumed after a change in income; change in consumption/change in income
Marginal Propensity to Save (MPS)
amount that is saved after a change in income; change in savings/change in income
what are the noneconomic determinants of consumption and savings
wealth, borrowing, and expectations
What is the wealth effect?
The tendency for people to increase their consumption spending when the value of their financial and real assets rises (prices falls) and to decrease their consumption spending when the value of those assets falls (prices rise)
What is interest?
the fee for borrowing money
what is the expected rate of return?
what we expect to get back from an investment; profit/cost
What is the real interest rate?
the amount a lender stands to make; the nominal interest rate minus the inflation rate
what factors cause shifts in the investment demand curve?
business costs, business taxes, technological change, planned inventory, and expectations.
business costs
acquistion, maintenance, operating costs; as business costs rise investment demand decreases
Business Taxes
as business taxes rise investment demand decreases; tax on profits
expectations
if expectations are high investment demand will rise
What is the multiplier effect?
measures the impact from a change in spending; a single change in spending has a larger impact than its intial amount
how to calculate the multiplier
1/(1-MPC) or change in real gdp/intial change in spending
how to calculate the change in gdp using the multiplier
(multiplier)(change in spending)
what kind of relationship does the multiplier and the MPS have?
inverse; the more people consume i.e. the less they save the larger the multiplier
private closed economy
just consumption and investment
What is equilibrium GDP?
Aggregate expenditures = gdp
What is disequilibrium GDP?
Aggregate expenditures does not equal gdp
private open economy
cosumption, investment, and net exports
what do international economic linkages determine?
positive or negative net exports
Foreign Determinants of Net Exports
prosperity abroad, tariffs, and exchange rates (booming dollar = more imports)
What are injections?
unplanned money going in; investment, government spending, exports
What are leakages?
unplanned money going out; savings, taxes, imports
at equilibrium leakages and injections are
equal
What is aggregate demand?
schedule or curve tthat shows amounts of real output that buyers collectively desire to purchase at each possible price level
what is the relationship between demand and price level?
inverse; as prices rise demand falls
What is the real balances effect?
when price level falls purchasing power increases which increases spending
What is the interest rate effect?
a decline in prices decreases the demand for money lowering interest rates and thus increasing investment
what is the foreign purchases effect?
The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.
determinants of aggregate demand
changes in consumption spending, consumer wealth, consumer expectations, household indebtedness, taxes, changes in investment spending, interest rates, business taxes, government spending, changes in net exports.
What is aggregate supply?
scheudle or cuvre showing the level of real domestic output that firms will produce at each possible price level
What is the LRAS curve?
reference point for where we should operate; left less using and right too much
determinants of aggregate supply
input prices, productivity, technology, government involvement
what is the intermediate range on the AS curve
full employment and ideal equilibrium point
what does the horizontal range experience
the full power of the multiplier
what is expansionary fiscal policy
stimulates the economy; decrease in taxes and/or increase in government spending
what is contractionary fiscal policy
dlows down the economy; increase in taxes and/or a decrease in government spending
borrowing money vs new money
a way to finance deficits by borrowing from the public or selling securities (bonds, bills, and notes)
money creation
avoids the crowding out effect but is inflationary
What is the crowding out effect?
Government borrowing increases interest rates and decreases private investment
debt reduction vs idle surplus
debt reduction: extra money towards debt or impounding which removes money from circulation. This is anti-inflammatory.
what is progressive income tax?
the more you mkae the more you're taxed; boosts surpluses in inflationary perods and increases deficits during recessionary periods
What is a regressive tax?
the less you make the more you are taxed
what is proportional/flate rate tax?
everyone in taxed the same
What is recognition lag?
the time between the beginning of recession or inflation and the certain awareness that it is actually happening (must be 6 months of downturn to be recession)
what is administrative lag?
time it takes congress to figure out a solution to the problem
what is operational lag?
once implemented the time it takes for a solution to work
how do political considerations impact the economy?
politicans implement policies to make them look good but they hurt the economy
how does state and local government finance impact the economy?
local/state government does opposite of federal government
WHat do shocks from abroad cause?
reduced investments
Note 
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