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Expenditure Model
A model that shows how GDP is determined based on expenditures including consumption, investments, government spending, and net exports.
Aggregate Planned Expenditures (AEp)
The total planned spending in an economy, AEp = C + Ip + G + NX.
Marginal Propensity to Consume (MPC)
The fraction of additional income that is consumed rather than saved.
Consumption Function
C = a + bY, Represents the relationship between total consumption (C) and disposable income (Y), with “a” as autonomous consumption and “b” as MPC.
Equilibrium GDP (Ye)
The level of GDP at which planned aggregate expenditures equal actual GDP, leads to no unplanned investments.
Unplanned Investment (Iu)
The difference between actual investment and planned investment that arises when there is a mismatch between planned and actual spending.
Fiscal Policy
Government policy regarding taxation and spending that aims to influence economic activity and move the economy toward equilibrium.
Stable Equilibrium
A situation in an economic model where once equilibrium is achieved, the economy will remain there unless disrupted by a change in plans.
Multiplier Effect
The economic principle that an initial increase in spending will lead to a larger overall increase in national income.
Tax Multiplier
The effect on GDP of a change in taxes, which is generally one less than the spending multiplier and negative due to its indirect effect on spending.
Medium of Exchange
A function of money that facilitates transactions by providing a widely accepted means for payment.
Standard of Value
A characteristic of money that provides a consistent measure for valuing goods and services.
Store of Value
A function of money that allows individuals to save purchasing power for the future.
Federal Reserve Responsibilities
The four major roles include conducting monetary policy, supervising banks, providing financial services, and maintaining stability during systemic risks.
Lender of Last Resort
The role of the Federal Reserve to provide liquidity to banks in times of financial distress to prevent bank runs.
Dual Mandate of the Fed
The Federal Reserve's objectives to control inflation and promote maximum sustainable employment.
