Econ 103 Study Guide
Aggregate Expenditure: relationship showing (at a given price level) Real GDP. * Y=C+I+G+NX
Consumption Function (C): A relationship between disposable income (income-tax) and consumption * C=a+b(Y-T) * a-autonomous spending * b-MPC * Y-Aggregate expenditure * T-net taxes (tY)
* Marginal Propensity to Consume (MPC) * Δ consumption/Δ disposable income * Marginal Propensity to Save (MPS) * Δ savings/ Δ DI * DI-MPC=Savings * MPS+MPC=1 * Determinants and Shifts in the Consumption Function * Net Wealth (assets-liabilities) * If Wealth up/consumption up * Price Level * If PL up/consumption down * Interest Rate * If IR up/consumption down * Expectations
Investment (I): new factories/equipment, inventories * autonomous (does not depend on DI) * Depends on interest rates. * If interest rates are high, investment is low
Government: government purchases made with federal, state and local taxes AND transfer payments (if income is up, transfer payments are down) * Autonomous
New Exports (NX): (exports-imports), autonomous * factors that shift net exports * Price Levels in US/ Abroad * If inflation is higher in US we import more – Ex. Down & Im up -NX down * Interest rates in US/Abroad * If interest rates are higher in US- Ex Up. Im Down. NX Up. * Foreign income levels * If foreign income levels rise- Ex up. Im Down. NX up. * Exchange rate * If US dollar is worth more- Ex down. Im Up. NX up * Marginal Propensity to import * Y=C+I+G+(X-M) * M=mY * m= import rate
Real GDP demanded: * Found when Aggregate Expenditure (Y)=Aggregate output * Intersection of consumption function and 45 degree line * 45 degree line is where spending = real gdp * Income expenditure model * Measures Real
Consumption Function (C): A relationship between disposable income (income-tax) and consumption * C=a+b(Y-T) * a-autonomous spending * b-MPC * Y-Aggregate expenditure * T-net taxes (tY)
* Marginal Propensity to Consume (MPC) * Δ consumption/Δ disposable income * Marginal Propensity to Save (MPS) * Δ savings/ Δ DI * DI-MPC=Savings * MPS+MPC=1 * Determinants and Shifts in the Consumption Function * Net Wealth (assets-liabilities) * If Wealth up/consumption up * Price Level * If PL up/consumption down * Interest Rate * If IR up/consumption down * Expectations
Investment (I): new factories/equipment, inventories * autonomous (does not depend on DI) * Depends on interest rates. * If interest rates are high, investment is low
Government: government purchases made with federal, state and local taxes AND transfer payments (if income is up, transfer payments are down) * Autonomous
New Exports (NX): (exports-imports), autonomous * factors that shift net exports * Price Levels in US/ Abroad * If inflation is higher in US we import more – Ex. Down & Im up -NX down * Interest rates in US/Abroad * If interest rates are higher in US- Ex Up. Im Down. NX Up. * Foreign income levels * If foreign income levels rise- Ex up. Im Down. NX up. * Exchange rate * If US dollar is worth more- Ex down. Im Up. NX up * Marginal Propensity to import * Y=C+I+G+(X-M) * M=mY * m= import rate
Real GDP demanded: * Found when Aggregate Expenditure (Y)=Aggregate output * Intersection of consumption function and 45 degree line * 45 degree line is where spending = real gdp * Income expenditure model * Measures Real