marginal propensity to save (MPS)
the change in saving divided by the change in disposable income. (increase in saving that results from in increase in income)
marginal propensity to consume (MPC)
slope of the consumption function. change in consumption over the change in disposable income
If aggregate expenditure=GDP
inventories are unchanged and economy is in macroeconomic equilibrium
If aggregate expenditure is less than GDP
inventories rise and GDP and employment decrease
If aggregate expenditure is greater than GDP
inventories fall and GDP and employment increase
Consumption function
relationship between consumption spending and disposable income . MPC is the slope.
cash flow
difference between the cash revenues received by a firm and the cash spending by the firm
Formula of aggregate expenditure
consumption+planned investment+gov. purchases+net exports (AE=C+I+G+NX)
aggregate expenditure=GDP
net exports
exports-imports. Can calculate by taking value of spending by foreign firms and households on goods and services produced in U.S. and subtracting value of spending by U.S. firms and households on goods and services produced in other countries. Net exports
Macroeconomic equilibrium occurs when
GDP=aggregate expenditure
45 degree line diagram
used to illustrated the macroeconomic equilibrium. It is also referred to as the Keynesian cross because it is based on the analysis of John Maynard Keyne. Shows all the points where aggregate expenditure equals real GDP.
Relationship between planned aggregate expenditure and GDP on 45 degree line diagram
Because macroeconomic equilibrium is GDP=aggregate expenditure, we know that all points of the macroeconomic expenditure must lie along the 45 degree line. If planned agg. expenditure is greater than gdp, points are above 45 line. If planned agg. expendit
aggregate expenditure function
shows the amount of planned aggregate expenditure that will occur at every level of national income or GDP
Macroeconomic equilibrium on a 45 degree line occurs when
AE (aggregated expenditure) line crosses the 45 degree line. Numerically it occurs when consumption+planned investment+gov purchases+net exports=GDP
What happens when there is a recession on the 45 degree line diagram
aggregate expenditure line intersects 45 degree line at a level of GDP below potential real GDP
autonomous expenditure
an expenditure that does not depend on the level of GDP. It is a change in expenditure not caused by a change in income
multilpier
change in equilibrium real GDP divided by the change in autonomous expenditure
multiplier effect
increase in autonomous expenditure leads to larger increase in real GDP. Also occurs when autonomous expenditure decreases.
paradox of thrift
John Keynes. What appears to be something favorable to the long-run performance of the economy might not be counterproductive in the short run. An attempt by many individuals to increase their saving may lead to a reduction in aggregate expenditure and re
aggregate demand curve (AD)
a curve that shows the relationship between the price level and the level of planned aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure.
inventories
goods that have been produced but not sold
What are the 5 determinants of consumption?
income,household wealth,expected future income, price level, and interest rate
What are the three determinants of net exports?
changes in the price level in US relative to changes in price level in other countries, growth rate of GDP in US relative to growth rates of GDP in other countries, and exchange rate between the dollar and other currencies
induced change
change in agg. expenditure caused by a change in income
The international-trade effect refers to the fact that an increase in the price level will result in
decrease in net exports
If the price level increases, then:
The economy will move up and to the left along a stationary aggregate demand curve.
How can government policies shift the aggregate demand curve to the right?
By increasing government purchases
An increase in net exports that results from a change in the price level in the United States
will not cause aggregate demand curve to shift
In the long run, increases in the price level do not affect real GDP.
...
Why does SRAS curve slope upward?
Because profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs.
What are menu costs?
Costs to firms of changing prices
What is the impact of an increase in the price level on the short run aggregate supply curve?
A movement of the economy up and to the right along a stationary curve.
aggregate demand and aggregate supply model
model that explains short-run fluctuations in real GDP and price level
aggregate demand curve
curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government
short-run aggregate supply curve
curve that shows the relationship in the short-run between the price level and the quantity of real GDP supplied by firms
monetary policy
actions the federal reserve tales to manage the money supply and interest rates to pursue macroeconomic policy objectives
fiscal policy
Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives
long-run aggregate supply curve
curve that shows the relationship between the price level and the quantity of real GDP supplied
supply shock
an unexpected event that causes the short-run aggregate supply curve to shift
stagflation
combination of inflation and recession, usually resulting from a supply shock
economic growth model
explains changes in real GDP per capita in the long run. Tells us economies grow when the quantity of capital per hour worked increases and when technological change takes place.
Labor productivity
quantity of goods and services that can be produced by one worker or by one hour of work. economic growth depends on increase in labor productivity
technological change
change in the ability of a firm to produce a gien level of output with a give quantity of inputs. 3 main sources of tech change: 1.better machines and equipment 2. increases in human capital 3. better means of organizing and managing production
human capital
accumulated knowledge and skills that workers acquire from education and training or from their life experiences
per-worker production function
shows relationship between capital per hour worked and real GDP per hour worked, holding technology constant.
new growth technology
model of long-run economic growth that emphasizes that technological change is influenced by how individuals and firms respond to economic incentives
patents
exclusive rights to a product of a period of 20 years from the date the product is invented. It is a way gov can promote technological change
catch-up
economic growth model predicts that poor countries will grow faster than rich countries
rule of law
ability of the government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts
foreign direct investment (FDI)
purchase or building by a corporation of a facility in a foreign country
foreign portfolio investment
purchase by an individual or firm of stocks or bonds issued in another country
globalization
process of countries becoming more open to foreign trade and investment. It can help poorer countries that have low levels of domestic saving and investment and that lack access to the latest technologies