Section 4 Vocabulary

Blanc. 24-25.

marginal propensity to consume (mpc)

marginal propensity to consume (mpc)

(change in consumption)/(change in disposable income)

marginal propensity to save (mps)

(change in savings)/(change in disposable income)

consumption

spending done by consumers

determinants of consumption

• disposable income

• wealth

• future expectations

• taxes

• interest rates

investment

spending done by producers on capital and structures

determinants of investment

• business costs

• taxes on investment

• production capacity level

• expected future sales

• interest rates

government spending

spending done by teh Federal Government

determinants of government spending

economic conditions: increase of recession and decrease in inflation

net exports (Xn)

exports minus imports

determinants of net exports

• national income

• relative prices

• exchange rates

definition of multiplier

a change in initial spending has a multiplied effect on real GDP

spending for one is income for the next

income earners consume the money and it re-enters the economy

formula for multiplier

(1)/(1-MPC) or (1)/(MPS)

formula to find the increase/decrease to real GDP

(change in spending)(multiplier)=(change in real GDP)

aggregate demand (AD)

a schedule that shows the amounts of real output that buyers collectively desire to purchase at different price levels

a downward (negative) sloping curve because as price levels rise, people have less purchasing power and will buy less (real wealth effect), interest rates rise and people will borrow less which lowers consumption and investment (interest rate effect), and foreigners will buy fewer American products (exchange rate effect)

causes of shifts in the AD curve

• changes in C, I, G, or Xn

• change in expectations

• change in the money supply

• change in wealth

short run aggregate supply (SRAS)

a schedule that shows the amounts of real output that firms collectively desire to produce at different price levels

an upward (positive) sloping curve (due to the fact that wages are slow to change even with enumployment in the short run due to labor contracts, aka sticky wages)

causes of shifts in the (SRAS)

• changes in cost of inputs

• changes in nominal wages

• change in productivity of labor

• changes in future prices

long run aggregate supply (LRAS)

a schedule that shows the ammount of real output that firms collectively desire to produce at different price levels in the long run

represented by a vertical line

causes of shifts in the LRAS curve

• change in the quantity of resources (factors of production)

• change in the quality of resources (factors of production)

• change in technology

fiscal policy for solving recession

expansionary: increase government spending, decrease taxes

fiscal policy for solving inflation

contractionary: decrease government spending, increase taxes

lags of fiscal policy

• takes time to enact desired effect

• economic needs change quickly

• politics

• crowding out effect (increase in gov spending causes decrease in other spending; is more likely in times of inflation)

• crowding in effect (increase in gov spending causes increase in other spending; is more likely in times of recession