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What is disposable income(YD)?
 YD = YT or YD = C+ S
 YGDP CConsumption
 TTaxes Ssaving

The relationship between consumption expenditure and disposable income, other things remaining the same, is the
Consumption Function

The relationship between saving and disposable income, other things remaining the same, is the
Saving Function

When consumption expenditure exceeds disposable income,
saving is negative (dissaving)

When consumption expenditure is less thandisposable income,
There is saving

The marginal propensity to consume (MPC) is the
 fraction of a change in disposable income spent on consumption.
 MPC = change in C / change in YD
 *MPC is the slope of the consumption function*

The marginal propensity to save (MPS) is the
 fraction of a change in disposable income that is saved.
 MPS = change in S / change in YD
 *MPS is the slope of the saving function

The marginal propensity to importis the
fraction of an increase in real GDP spent on imports.

Aggregate planned expenditure is
planned consumption expenditure plus planned investment plus planned government expenditure plus planned exports minus planned imports.

Induced expenditure is
Consumption expenditure minus imports, which varies with real GDP.

Autonomous expenditure is
The sum of investment, government expenditure, and exports, which does not vary with Real GDP.

Actual aggregate expenditureis always equal to
real GDP

Aggregate planned expendituremay differ from actual aggregate expenditure because firms can have
inventories that are greater or smaller than planned.

Equilibrium expenditureis the level of aggregate expenditure that occurs
when aggregate expenditure equals real GDP.

Equilibrium occurs at the point at which the aggregate expenditure curve crosses
the 45°line

The multiplier is the amount by which a change in ______________________ is magnified or multiplied to determine the change in _____________________
 autonomous expenditure
 equilibrium expenditure and real GDP

The size of the multiplier is
 the change in equilibrium expenditure divided by the change in autonomous expenditure.
 Multiplier = 1/(1slope of AE curve)
 Multiplier = Change in Y / Change in autonomous expedniture, A

The multiplier in terms of MPS and MPC is
 multiplier = 1/(1MPC)
 1MPC = MPS
 Multiplier =1/MPS

Both imports and income taxes ____ the size of the multiplier.
recude

The aggregate expenditure curve is the relationship between
aggregate planned expenditure and real GDP

The aggregate demand curveis the relationship between
The quanitity of real GDP and the price level

In the long run the multipier is equal to
zero

