Macro-Economics Mid-Term 2

Budget Deficit

When a government's total spending exceeds the amount of revenue it collects.

Disposable Income

Money someone has after paying taxes.

Consumption

Money left for personal/final goods.

APC (Average Propensity to Consume)

Total Consumption / Total Disposable Income.

APS (Average Propensity to Save)

Total Saving / Total Disposable Income.

Dissaving

Spending more money than disposable income recieved.

MPC (Marginal Propensity to Consume)

Change in Consumption / Change in Income.

Cyclical Unemployment

When the aggregate demand for a job is low, causing unemployment to rise.

Multiplier Function

1 / (1 - MPC)

Fiscal Policy

The government increasing spending and decreasing taxes to improve a nation's economy.

The general formula for computing the desired tax cut

The desired fiscal stimulus divided by the MPC.

Income transfers

Payments to individuals for which no current goods or services are exchanged (Free Money).

Formulas used to calculate the cumulative increase in aggregate demand from a particular fiscal stimulus?

The Multiplier x The Fiscal Stimulus.

Monetary Policy

Using interest rates to influence the economy.

“Government Spending” Formula

Multiplier (1/(1-MPC)) X Spending

“Transfer Payment” Formula

MPC X Payment = ??? THEN ??? X Multiplier

“Fiscal Stimulus” Formula

AD Shortfall Amount / Multiplier

“Consumption Equation”

C = a+(MPC x Y)

a is spending when income = 0

Y is income

C is consumption

Structural Deficit

Extra money the government spends in the Budget Deficit