Keynesian Aggregate Expenditure Model and Equilibrium Income

Vocabulary flashcards covering the core concepts, model assumptions, and graphical elements of the Keynesian aggregate expenditure model from the lecture.

Circular Flow Model

An economic framework that tracks performance through spending, analogized to a bathtub where drains represent leakages and faucets represent injections.

Aggregate Demand (Aggregate Expenditure)

Total spending in the economy, comprising four distinct categories: household consumption ($C$), business planned investment ($I$), government spending ($G$), and net spending from the rest of the world.

Inventories

The component of actual business investment that is explicitly excluded from the lecture's aggregate expenditure models.

Autonomous Consumption

The vertical intercept or constant in the consumption function, representing spending that occurs independently of and is not determined by income ($Y_d = 0$).

Marginal Propensity to Consume (MPC)

The slope ($\text{rise} / \text{run}$) of the consumption function that indicates how much consumption changes when disposable income changes.

Equilibrium Line

A reference line with a slope of $1$ on the spending-income graph representing the infinite set of points where total spending exactly matches total income.

Equilibrium Condition

The mathematical state where aggregate spending equals aggregate income, meaning leakages equal injections and all production output is sold.

Leakages

Withdrawals from the circular flow of income, represented specifically in the lecture's models by savings and taxes.

Injections

Additions of spending into the circular flow of income, specifically planned investment, government spending, and exports.

One-Sector Model

A simple aggregate expenditure model that accounts solely for the household sector via the consumption function ($C$).

Two-Sector Model

An aggregate expenditure model that incorporates both household consumption and business planned investment ($C + I$).

Three-Sector Model

An aggregate expenditure model combining consumption, planned investment, and government spending ($C + I + G$).

Planned Investment ($I$)

Business spending limited to plant and equipment, treated exogenously in the model as an autonomous constant.

Animal Spirits

John Maynard Keynes's term for the volatile, intuitive, psychological, and emotional gut feelings that drive business risk-taking and expectations of profitability.

Investment Demand Curve

A downward-sloping curve illustrating the inverse relationship between the interest rate (cost of borrowing) and the quantity of planned investment, shifted by changes in business expectations.

Autonomous Spending

Any component of spending that is separate and independent of income levels, represented graphically by the vertical intercepts of the spending curves.