Macroeconomics: chapter 12

Flashcards for reviewing key macroeconomic vocabulary related to consumption, real GDP, and the multiplier.

Disposable Income (Yd)

After-tax income of consumers.

Consumption (C)

Household spending on goods and services.

Saving (S)

The part of disposable income that is not spent; S = Yd - C.

Dissaving

Negative saving; occurs when consumption is greater than income.

Consumption function

The relationship between the amount consumed and disposable income; how much people consume at various levels of disposable income; it is written as: C = a + bYd

Autonomous consumption (a)

Consumption that is independent of the level of disposable income; level of consumption that occurs when income is zero; changes in autonomous consumption shift the consumption function up and down in a graph.

Marginal propensity to consume or MPC (b)

The change in consumption divided by the change in disposable income; the fraction of each additional dollar of income that is spent.

Marginal propensity to save or MPS

The change in saving divided by the change in disposable income; the fraction of each additional dollar of income that is saved.

Average propensity to consume or APC

Consumption divided by disposable income; the percentage of income that is consumed.

Average propensity to save or APS

Saving divided by disposable income; the percentage of income that is saved.

Net wealth

The stock of assets owned minus debts owed (shifts the consumption function).

Multiplier effect

Occurs when a change in spending leads to a greater change in real GDP.

Multiplier Formula

Change in equilibrium real GDP = multiplier × change in autonomous spending