Module 7-Aggregate Expenditure

What is the primary focus of the Keynesian model in the context of aggregate expenditure?

The relationship between disposable income, consumption, and saving.

What is disposable income (Yd) defined as?

Yd = Y - T, where Y is GDP and T is taxes.

What does the equation Yd = C + S represent?

The relationship between disposable income, consumption (C), and saving (S).

What is the Marginal Propensity to Consume (MPC)?

The ratio of the change in consumption to the change in disposable income.

How is the Marginal Propensity to Save (MPS) calculated?

MPS = 1 - MPC.

What is autonomous consumption?

Consumption that is independent of disposable income, which can be positive or negative.

What is dissaving?

Negative saving, where spending exceeds income.

What are the components of the aggregate expenditure model?

C + I + G + NX, where C is consumption, I is investment, G is government spending, and NX is net exports.

What is the significance of the multiplier effect in the aggregate expenditure model?

It measures how an initial change in spending leads to a larger overall change in GDP.

What does the consumption function illustrate?

The relationship between consumption and disposable income.

What are the three ways to represent the aggregate expenditure model?

Table form, graph form, and algebraic form.

What is the formula for planned consumption in the context of the consumption function?

Consumption = (MPC)*(Yd) + Constant.

What does the term 'actual equilibrium' refer to in the aggregate expenditure model?

The point where aggregate expenditure equals actual GDP.

What factors can shift the consumption function?

Non-income determinants such as cost and price levels.

What is the relationship between aggregate expenditure and aggregate demand?

The aggregate expenditure model helps illustrate the aggregate demand curve.

What is the equation for equilibrium GDP in the context of the aggregate expenditure model?

Equilibrium occurs when GDP = Y = C + I + G + NX.

What is the role of planned investment in the aggregate expenditure model?

It is added to the model to determine overall economic equilibrium.

What does the average propensity to consume measure?

The total consumption divided by total disposable income.

What is the break-even income in the context of consumption and saving functions?

The level of income where consumption equals disposable income, and saving is zero.

What are the determinants of consumption?

Wealth, liquidity, availability of credit, expected future income, interest rates, confidence, taxes, and consumption tax expectations.

What is planned investment in economics?

Planned investment refers to the amount businesses intend to invest in capital goods, which can be affected by factors like expectations of future profitability and technology.

What is the relationship between planned investment and actual investment?

Actual investment equals planned investment plus unplanned investment, where unplanned investment is the change in inventories.

Why is investment historically more volatile than consumption?

Investment is more volatile due to its sensitivity to changes in economic conditions and business expectations.

What does the aggregate expenditure model include?

The aggregate expenditure model includes consumption (C), investment (I), government spending (G), and net exports (NX).

What is a lump-sum tax?

A lump-sum tax is a tax that does not depend on income or the circumstances of the taxpayer and is considered autonomous.

How is equilibrium in the aggregate expenditure model achieved?

Equilibrium is achieved when aggregate expenditure equals aggregate production, meaning C + I + G + NX equals GDP.

What happens when C + I + G + NX exceeds GDP?

An unplanned drop in inventories occurs, prompting businesses to increase output, which raises GDP until equilibrium is restored.

What is the multiplier effect?

The multiplier effect refers to the ratio of the change in equilibrium national income to the change in autonomous expenditures, demonstrating how initial spending can lead to a larger overall economic impact.

How does the multiplier effect relate to investment?

An increase in investment can lead to a multiplied increase in GDP, as demonstrated by the relationship between changes in investment and changes in overall economic output.

What is the formula for the multiplier?

The multiplier is calculated as the change in equilibrium income divided by the change in autonomous spending.

What effect do flexible prices have on the multiplier?

With flexible prices, the multiplier effect on equilibrium real national income may be less pronounced, as part of the increase in nominal income may occur due to rising prices.

What is the relationship between the aggregate expenditure model and the aggregate demand curve?

The aggregate expenditure model illustrates how total spending in the economy (C + I + G + NX) relates to the aggregate demand curve, showing how changes in price levels can affect equilibrium GDP.

What happens to aggregate expenditure when prices increase?

When prices increase, aggregate expenditure (C + I + G + NX) typically decreases, leading to a lower equilibrium GDP.

What are investment shifters?

Investment shifters include expectations of future profitability and technological advancements that can influence business investment decisions.

What is the significance of the aggregate expenditure model in determining GDP?

The aggregate expenditure model is crucial for understanding how various components of spending contribute to the overall economic output and equilibrium GDP.

What is the effect of unplanned inventory changes on GDP?

Unplanned inventory changes can lead businesses to adjust their output levels, affecting GDP until a new equilibrium is reached.

How do government spending and net exports fit into the aggregate expenditure model?

Government spending (G) and net exports (NX) are essential components of the aggregate expenditure model, influencing overall demand in the economy.

What is the role of confidence in economic consumption?

Consumer confidence affects spending decisions, as higher confidence typically leads to increased consumption and economic activity.

What is the impact of interest rates on planned investment?

Higher interest rates can discourage planned investment by increasing the cost of borrowing, while lower rates can encourage investment.

What is the significance of real disposable income in consumption?

Real disposable income is a key determinant of consumption, as it represents the income available to households after taxes and is adjusted for inflation.

What are the components of net exports?

Net exports (NX) are calculated as exports minus imports, reflecting the trade balance of an economy.

What does the term 'autonomous variables' refer to in the context of the aggregate expenditure model?

Autonomous variables are those that are predetermined and do not change with equilibrium, such as government spending and certain types of consumption.