Equilibrium in the Goods Market

Vocabulary practice flashcards covering macroeconomics concepts like the Goods Market Equilibrium, the IS Curve, and the Investment Multiplier based on Unit 7 lecture notes.

Disposable Income

Income net of taxes, expressed as $Y - T$.

Consumption Function

The relationship used to make consumption decisions based on disposable income, expressed as $C = C_0 + MPC(Y - T)$.

Marginal Propensity to Consume (MPC)

The amount by which consumption changes when disposable income increases by one dollar.

Aggregate Saving (S)

The part of aggregate income that is not consumed.

Marginal Propensity to Save (MPS)

The fraction of a change in income that is saved, calculated as $1 - MPC$.

Autonomous Consumption

How much an individual spends when disposable income ($Y - T$) is equal to $0$.

Capital

Stock items that firms buy as investment goods to add to their existing stock or to replace worn-out equipment.

Real Interest Rate (r)

A measure of the cost of funds used to finance investment; a primary determinant of investment demand.

Opportunity Cost

The interest payment foregone when using your own cash to finance an investment rather than lending it to others.

Planned Investment (I)

Additions to capital stock and inventory that are intended or scheduled by firms.

Actual Investment ($I_a$)

The actual amount of investment that takes place, including items such as unplanned changes in inventories.

Inventory

The stock of goods that a firm has awaiting sale.

Unplanned Inventory Change

The difference between actual and planned investment caused when a firm's actual sales do not match its predictions.

Investment Function

The assumption that the amount of investment is negatively related to the interest rate ($I = f(r)$).

Government Purchases

Spending by the government on goods and services that are included in the GDP component.

Transfer Payments

Government payments made to households, such as Social Security or unemployment insurance, that are not included in GDP.

Budget Deficit

The difference between what a government spends and what it collects in taxes when $G > T$.

Budget Surplus

The situation occurring when the government collects more in taxes than it spends ($T > G$).

Exogenously Set

Values that are fixed or determined outside of the model, such as the initial assumptions for Government spending and Taxes.

Planned Aggregate Expenditure (PE)

The total amount the economy plans to spend in a given period, equal to $C + I + G$.

Actual Aggregate Expenditure (AE)

The total amount the economy actually spends in a given period.

Equilibrium

The state where actual expenditure equals planned expenditure ($Y = PE$) and no househould or firm wants to change their decision.

Real GDP (Production)

Represented by $Y$, it is the total amount being produced in the economy.

Inventory Accumulation

The effect when aggregate production is greater than planned expenditure ($Y > PE$).

Inventory Depletion

The effect when aggregate production is less than planned expenditure ($Y < PE$).

45-degree Line

A graphical line representing all points where the value on the y-axis (PE) is the same as the x-axis (Y).

Investment Multiplier

The ratio of the change in the equilibrium level of output to a change in investment, calculated as $\frac{1}{1 - MPC}$.

IS Curve

The relationship between aggregate output and the interest rate in the goods market.

Wealth

A secondary factor besides disposable income that influences household consumption decisions.

Expectations of the Future

One of the determinants of consumption that considers future economic outlooks.

Profitability Criterion

The rule that an investment project is only pursued if its return is greater than the interest rate.

Net Taxes

Gross Tax Revenue minus Transfer Payments.

Negative Tax

A way to conceptually define Government Transfers to households.

Multiplier Effect

The cycle where a change in investment changes income, which in turn changes consumption and further impacts output.

Wealth and Interest Rate Factors

External variables that can cause the consumption function and planned expenditure line to shift.