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What is disposable income(YD)?
- YD = Y-T------ or------ YD = C+ S
- Y-GDP------------------- C-Consumption
- T-Taxes------------------ S-saving
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The relationship between consumption expenditure and disposable income, other things remaining the same, is the
Consumption Function
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The relationship between saving and disposable income, other things remaining the same, is the
Saving Function
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When consumption expenditure exceeds disposable income,
saving is negative (dissaving)
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When consumption expenditure is less thandisposable income,
There is saving
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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*
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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
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The marginal propensity to importis the
fraction of an increase in real GDP spent on imports.
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Aggregate planned expenditure is
planned consumption expenditure plus planned investment plus planned government expenditure plus planned exports minus planned imports.
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Induced expenditure is
Consumption expenditure minus imports, which varies with real GDP.
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Autonomous expenditure is
The sum of investment, government expenditure, and exports, which does not vary with Real GDP.
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Actual aggregate expenditureis always equal to
real GDP
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Aggregate planned expendituremay differ from actual aggregate expenditure because firms can have
inventories that are greater or smaller than planned.
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Equilibrium expenditureis the level of aggregate expenditure that occurs
when aggregate expenditure equals real GDP.
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Equilibrium occurs at the point at which the aggregate expenditure curve crosses
the 45°line
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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
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The size of the multiplier is
- the change in equilibrium expenditure divided by the change in autonomous expenditure.
- Multiplier = 1/(1-slope of AE curve)
- Multiplier = Change in Y / Change in autonomous expedniture, A
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The multiplier in terms of MPS and MPC is
- multiplier = 1/(1-MPC)
- 1-MPC = MPS
- Multiplier =1/MPS
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Both imports and income taxes ____ the size of the multiplier.
recude
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The aggregate expenditure curve is the relationship between
aggregate planned expenditure and real GDP
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The aggregate demand curveis the relationship between
The quanitity of real GDP and the price level
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In the long run the multipier is equal to
zero
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