Income-Expenditure Model - ECON 202

A set of vocabulary flashcards based on the Income-Expenditure Model from ECON 202 lecture notes.

Income-Expenditure Model

Originally developed by John Maynard Keynes, this model illustrates how higher expenditures generate higher income levels in an economy.

Short-run Equilibrium

A situation where aggregate demand equals output, with fixed prices and other variables, reflecting immediate economic conditions.

Consumption Function

Describes the relationship between income level (y) and desired consumption spending (C), expressed as C = Ca + b × y.

Marginal Propensity to Consume (MPC)

The fraction of additional income that is spent on consumption, denoted as 'b' in the consumption function.

Equilibrium Output (y*)

The level of output where desired spending equals the actual output, represented in the model as y* = Ca + I / (1 - b).

Multiplier Effect

A concept where an initial change in spending leads to a larger overall increase in economic activity due to subsequent rounds of spending.

Automatic Stabilizers

Features of fiscal policy (like taxes and transfer payments) that automatically change with economic conditions to stabilize GDP without explicit government action.

Balanced Budget Multiplier (BBM)

The concept that an equal increase in government spending and taxes will always lead to an increase in output by a factor of one.

Fiscal Policy

Government policy regarding taxation and spending, aimed at influencing economic activity, especially in the short-run.

Exports and Imports

Economic activities where exports add to aggregate demand while imports reduce it; the model adjusts for both in an open economy.

Sticky Prices

A situation where prices do not adjust quickly to changes in demand, often influencing short-run economic outcomes.

Keynesian Cross

A graphical representation of the income-expenditure model, demonstrating the point where output and planned expenditures intersect.

Government Spending Multiplier

The increase in national income resulting from a rise in government spending, which can be calculated using the formula based on MPC.

Consumption Multiplier

The effect on overall output resulting from changes in consumption due to changes in income, shown as ∆Y = (1 / (1 - b)) ∆Ca.

Investment

The spending on capital goods that will be used to produce goods and services, a crucial part of aggregate demand.

Short-run assumptions

Factors held constant in the income-expenditure model, such as fixed prices, interest rates, and wages.

Identity Function

The basic equation in the income-expenditure model that states Y = C + I + G + NX, representing the components of total output.