Unit 4 Macro: Income and Expenditures

investment spending

money spent by businesses for capital to produce more G/S

aggregate output

total overall quantity of G/S produced

income

payments made from businesses to households for their labor

disposable income

amount of money consumers can spend after taxes have been taken out

investment

rise and fall of ___ spending becomes rise and fall in incomes

chain reaction

investment spending becomes consumer spending because it’s a ___ ___

overall spending

increases/decreases in ___ ___ leads to increases/decreases in aggregate output/production

same amount

increases in investment spending leads to increases in income and increases in aggregate output by the ___ ___

consumer spending

with increases in output and incomes, households have more money to spend = increase in disposable incomes = increases in ___ ___

ripple effect

investment spending rise = disposable income rise = consumer spending rise

marginal propensity to consume

how much do consumers increase spending when disposable income increases

mpc

change in consumer spending / change in disposable income

1>mpc>0

we don’t spend all of our income, we also save some so…

1-mpc

marginal propensity to save

1/1-mpc or 1/mps

the multiplier formula

initial

use the multiplier to multiply the ___ amount of the investment spending by this

productivity

the multiplier tells us how much ___ was added to the economy when a firm chooses to invest in capital for production

disposable

consumer spending dependent on consumer ___ income

consumption function

how spending is affected by changes in disposable income

c=a+mpc(yd)

consumption function formula

a

autonomous consumer spending (how much a household would spend if they had no disposable income), always >0 bc people would borrow money or use savings

yd

disposable income

upward

the consumption function is ___ sloping

slope

mpc is the ___ of the consumption function graph

y intercept

autonomous consumption is the ___ of the consumption function graph

aggregate consumption function

the individual consumption functions added and become the overall/aggregate consumption function for the whole economy

C=A+MPC(Yd)

aggregate consumption function formula

expected future yd

1) shift of aggregate consumption function

more

1) shift of ACF - expected yd increase (consumers will spend ___ at every level of income, shift up)

less

1) shift of ACF - expected yd decrease (consumers will spend ___ at every level of income, shift down)

changes in aggregate wealth

2) shift of aggregate consumption function

up

2) shift of AFC - people with more wealth (consumers will spend more at every level of income, shift ___)

down

2) shift of ACF - fewer people with accumulated wealth (consumers will spend less at every price level of income, shift ___)

investment spending

most increases or decreases in market performance are caused by increases or decreases in ___ ___

inverse relationship

interest rates have an ___ ___ with investment spending

decrease

bc much of investment spending is via loans, increased rates = ___ in investment spending

increase

bc much of investment spending is via loans, decreased rates = ___ in investment spending