Chapter 11: Expenditure Multipliers

These flashcards cover the key concepts related to expenditure multipliers, including definitions of important terms and relationships in the economy when the price level is fixed.

Expenditure Multiplier

The amount by which a change in autonomous expenditure is magnified to determine the change in equilibrium expenditure and real GDP.

Autonomous Consumption

Consumption expenditure that occurs even when disposable income is zero.

Induced Consumption

Consumption expenditure that occurs as a result of increased disposable income.

Marginal Propensity to Consume (MPC)

The fraction of a change in disposable income that is spent on consumption.

Marginal Propensity to Save (MPS)

The fraction of a change in disposable income that is saved.

Two-Way Link

The relationship in which an increase in real GDP increases aggregate expenditure, and an increase in aggregate expenditure increases real GDP.

Disposable Income (YD)

Real GDP minus net taxes; the income available to households for spending and saving.

Consumption Function

The relationship between consumption expenditure and disposable income, showing that consumption increases as disposable income increases.

Saving Function

The relationship between saving and disposable income, indicating that saving increases as disposable income increases.

Equilibrium Expenditure

The level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP.

Aggregate Expenditure Curve

A graph showing the relationship between aggregate planned expenditure and real GDP.

Actual Aggregate Expenditure

The total amount of spending in the economy, which equals real GDP.

Multiplier Process

The process by which an initial change in autonomous expenditure leads to a greater overall change in aggregate expenditure and real GDP.