Unit 3: Aggregate Demand and the Multiplier Model

These flashcards cover key concepts from Unit 3 regarding aggregate demand, GDP, the multiplier model, and the business cycle.

What is the definition of GDP as expenditure?

Sum of expenditure by households on consumer goods (C), by firms & government on fixed investment (I), by firms on changes in inventories (II), by government on goods and services (G), and exports (X), minus imports (M).

What does the multiplier model demonstrate?

How spending decisions generate demand for goods and services, determining levels of employment and output.

What is autonomous consumption?

Level of consumption that occurs independently of income levels, represented in the consumption function as c0.

What are the two definitions of recession?

The NBER definition states that recession is when output is declining, while the alternative definition states it's when output is below its normal level.

How is GDP per capita calculated?

Calculated by dividing the GDP by the size of the country’s population, giving an average income measure of living standards.

What is the purpose of the circular flow model in economics?

How money flows through the economy between firms and households, showing the relationship between production, income, and expenditure.

What is the marginal propensity to consume (MPC)?

Amount of additional consumption that occurs with an increase in income, represented as c1 in the consumption function.

What happens during the multiplier process in an economic upswing?

Increased employment leads to higher income, which increases demand for goods and services. This causes firms to hire more and produce more.

What is meant by goods market equilibrium?

When aggregate demand equals the quantity of output being produced, meaning the economy is at a stable output level.

What factors contribute to the volatility of investment spending in firms?

Factors such as identification of profit opportunities, new technologies, and the ability to postpone investments.

How do households react to economic shocks?

By smoothing consumption in an economic shock, but can be credit constrained or may cut back on spending entirely to maintain savings.