Economics Hubbard O'Brien Chapter 11

The total amount of spending in the economy: the sum of consumption, planned investment, government purchases, and net exports

Aggregate expenditure(AE)

A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant

Aggregate expenditure model

what are goods that have been produced but not yet sold called?

Inventories

macroeconomic equililbrium occurs when

AE=GDP

if AE is less than GDP, inventories BLANK, and GDP and employment BLANK

inventories rise
GDP and employment decrease

if AE is greater than GDP, inventories BLANK, and GDP and employment BLANK

Inventories fall and GDP and employment increase

Current disposable income, Household wealth, expected future income, the price level, and the interest rate are five important variables that determine the level of what?

determine the level of CONSUMPTION

What is the most important determinant of consumption ?

Current Disposable Income

whats the relationship between consumption and disposable income called?

consumption function

the slope of the consumption function is equal to what and what is it (the slope) referred to as?

the slope is referred to as MPC(marginal propensity to consume)

MPC = change in C(consumption) / change in YD(disposable income)

Disposable income =

Disposable income = national income - net taxes.

National Income =

National income = GDP = Disposable income + Net Taxes

consumption +saving +taxes =

National Income

The change in saving divided by the change in disposable income

MPS (Marginal Propensity to Save)

MPC+MPS must equal what?

must equal '1'

Expectations of future profitablity, Interest rate, taxes, and cash flow are the four most important variables that determine the level of what?

the level of investment

what is an important determinant in investment spending?

The optimism or pessimism of firms

what does a higher real interest rate do to investment spending?

it lessens investment spending

a lower interest rate does the opposite; more investment spending

this is when a firm uses their own profits or earning to spend on capital.

Cash flow

The price level in the US relative to the price levels in other countries, The growth rate of GDP in the US relative to the growth rates of GDP in other countries, and the exchange rate between the dollar and other currencies are the three most important variables that determine the level of what?

the level of NET EXPORTS

what is commonly referred to as the 'Keynesian cross'?

the 45 degree line diagram that shows how GDP and AE equal each other.

The 45 degree line diagram is crossed by GDP and its components and symbolizes what when they are crossed?

It symbolizes what the current AE is depending on how many components of GDP have been added to each other.

In a closed economy, consumers spend $300 regardless of the level of income, and the marginal propensity to consume (MPC) is 0.75. Investment is equal to $350. The government spends $300 and collects $100 in taxes.

Whats The Equilibrium level of GDP in this economy? show steps and work it outtt

$3500

225+300+350 = y....... use mpc(.75) with the multiplier effect to get 4.........................multiply y with 4 to get final answer

whats the equation for the multiplier

increase in equilibrium real GDP DIVIDED BY the increase in autonomous expenditure ALTERNATIVELY: 1/(1-MPC)

An expenditure that does not depend on the level of GDP

Autonomous expenditure

The process by which an increase in autonomous expenditure leads to a larger increase in real GDP

Multiplier effect

a rising price level increases/decreases consumption by increasing/decreasing the real value of household wealth.

decreasing and decreasing. its the reverse effect for a falling price level.