Macroeconomics - 3.1, 3.2, 3.3, 3.4, 3.5, 3.6

Marginal Propensity to consume

The amount the household spends out of each additional $1 of current disposable income

Marginal Propensity to save

Autonomous change in aggregate spending

Spending Multiplier

Ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change.

Consumption Function

Uses an equation or a graph to show how a household’s income spending varies with the household’s current disposable income.

Vertical intercept - Household’s autonomous consumer spending (greater than zero bc they can buy using borrowed money or savings.

Slope - Rise in the increase in consumer spending and the run is the increase in current disposable income (MPC/1 = MPC)

Autonomous consumer spending

The portion of consumer spending that is independent of current income levels

Aggregate consumption function

Shows the relationship between current disposable income and consumer spending for the economy as a whole, other things equal

Planned investment spending

The investment spending that firms intend to undertake during a given period

Depended on: The interest rate, the expected future level of real GDP, and the current level of production capacity

Inventory investment

The value of the change in total inventories held in the economy during a given period. Can be negative

Unplanned inventory investment

When the firm’s inventories are higher than intended due to an unforeseen decrease in sales, resulting in unplanned inventory investment.

Actual Investment Spending

= planned investment spending + unplanned inventory investment

Aggregate demand curve

Shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, firms, the government, and the rest of the world.

→ downwards sloping, shows a negative relationship between the aggregate price level and the quantity of aggregate output demanded

Wealth effect of a change in the aggregate price level

A change in the price level, changes the purchasing power of assets causing consumers to buy more (or less) goods and services

Interest rate effect of a change in the aggregate price level

A change in price level, changed the amount of savings in the economy, which changes the interest rate. This leads to a change in borrowing and investment

Fiscal policy

The use of either government spending - government purchases of final goods and services and government transfers- or tax policy to stabilize the economy

Monetary policy

Use of changes in the quantity of money or the interest rate to stabilize the economy

Aggregate Supply curve

National Wage

Sticky wages

Short-run aggregate supply curve