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2nd test - Chapter 8 Aggregate Expenditure Equilibrium...

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Chapter 8: Aggregate Expenditure & Equilibrium Output Aggregate Output & Aggregate Income (Y) o Aggregate Output can also be called ‘Aggregate Quantity Supplied’ because it’s the amount that firms are producing during that period of time o Also means “Real GDP” o Income (y), Consumption (c), and Saving (s) o Saving: whatever income isn’t consumed o Spending Behavior o Determinants of spending by a household: Household’s income (y d ) Wealth (w) Interest rates (i) Expectations (e) o Relationship between consumption and income is called The Consumption Function Has a positive slope / it’s directly related o Marginal Propensity to Consume (MPC): the fraction of change in income that’s consumed. The larger the MPC, the more C increases when income increases. o ∆C/∆Y d o Marginal Propensity to Save: ∆S/∆Yd o Avg. Propensity to Consume: C/ Yd o Avg. Propensity to Save: S/Y d o Investment: purchases by firms of new buildings & equipment/inventories, all of which add to the firms capitol stock o Planned Aggregate Expenditure: sum of consumption and planned investment
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o Equilibrium Aggregate Output (Income): when y= AE or y = c+i The Multiplier o Multiplier: ratio of the change in the equilibrium level of output to a change in some autonomous variable o ∆equilibrium level of output / ∆in an autonomous variable o Autonomous Variables: a variable that’s assumed not to depend on the state of the economy – it’s not contingent upon the economy o Size of multiplier depends on the slope of the planned AE.
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