Aggregate Expenditures and supply

Disposable Income (DI)

The amount of income available to spend or save after taxes have been paid

Disposable Income fourmula

Income (Y) minus taxes (T)

DI = Y - T

Taxes (T)

Revenues collected by the government from individuals and firms

Real gross domestic product (real GDP, Y)

A measure of the constant dollar value of all final goods and services produced in a country during a fixed period of time

• sometimes called “inflation adjusted GDP”

• When an economy is in equilibrium, real GDP = Y

Consumption

All expenditures made by households on goods and servic

Marginal proprensity to consume (MPC)

The fraction of each additional dollar of income that is spent on consumption

Marginal Propensity to Save (MPS)

The fraction of each additional dollar of income that is saved

Marginal Propensity to Save (MPS) formula

MPS = Change in savings / Change in income

The consumption / Savind identity

Marginal propensity to consume (MPS) + Marginal propensity to save (MPC) = 1

Consumption schedule

A graph showing the relationship between income and consumption

Equilibrium line

The 45 degree line through the origin that represents all points at which aggregate expenditures (AE) are equal to output or real GDP (Y)

Autonomous consumption (A)

The level of consumption expenditure when income is equal to 0

• funded by drawing on savings or by borrowing

Savings schedule

A graph showing the relationship between inco

Savings formula

S = Disposable income (DI) - Consumption (C)

Investment demand

The negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate

Expected rate of return

An anticipated increase in profit resulting from additional investment

• expressed as a precentage of the monetary cost of the additional investment

Interest rate

the payment made to agents that lend or save money, expressed as an annual percentage of the monetary amount lent or saved

• sometimes called nominal interest rate or price of money
  

Real interest rate

The interest rate paid to lenders and savers when the expected rate of inflation equals zero

• the inflation adjusted return, equal to the nominal interest rate minus the inflation rate

Capital goods

Durable (long lasting) goods that are used to produce other goods and services, also referred to as capital

Marginal decision making

The process of making choices in increments by evaluating the additional or marginal benefit against the additional or marginal cost of action

Optimization

The idea that people make choices in order to maximize the overall benefit, or utility of an action subject to its cost

Autonomous consumption (A)

The level of consumption expenditure when income is equal to zero

Net exports schedule

In the aggregate expenditures model, a horizontal line showing the relationship between net exports (NX) and the level of real GDP (Y) in the economy

Expenditures multiplier

The effect that a $1 change in expenditures has on real GDP; calculated as the ratio of the total change in real GDP due to a change in initial expenditure

Expenditures multiplier

Change in y / change in expenditures

1 / 1- MPC

1 / MPS

Multiplier efffect

The concepts that an additional dollar of expenditures will result in the acreation of more than one dollar’s worth of real GDP

Tax multiplier

The effect that a $1 change in taxes has on real GDP; in the aggregate expenditures model, calculated as the change in output divided by an initial change in taxes

Tax multiplier formulas

Change in real GDP / Change in Taxes

Change in y / Change in t

-MPC / 1 - MPC

Aggregate expenditures equilibrium identity (Equilibrium Line)

AE = Y

Aggregate expenditures model formula

AE = C + I + G + NX

C = A + [ MPC x ( Y - T)]

Aggregate Expenditures model, Expanded form

AE = A + [MPC x (Y - T)] + I + G + NX

Aggregate Expenditures Model - Equilibruim

Ye = [( 1 / 1 - MPC) x ( A + I + G + NX)] + [( - MPC / 1 - MPC) x T]

Recessionary gap

The difference between expenditure when real GDP is below the full employment level and the level of expenditure at full - employment real GDP

Inflationary gap

The difference or gap, between expenditure when real GDP is above the full - employment level and the level of expenditure at full - employent real GDP

Output gap

The difference or gap between current real GDP and full - employment real GDP

Full - employment real GDP

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment. Also the level of real GDP produced when the economy is in a long - run equilibrium