Test 3 Study Guide - Test Three Study Guide Good luck God...

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Exploring Macroeconomics
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Chapter 6 / Exercise 8a
Exploring Macroeconomics
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Test Three Study Guide Good luck, God Speed Chapter 12: Aggregate Expenditure and Output in the Short-Run – Hubbard 0’Brien Aggregate Expenditure Model o Aggregate expenditure – total spending in the economy: the sum of consumption, planned investment, government purchases, and net exports o Aggregate Expenditure Model: a macroeconomic model that focuses on the short-run relationship between total spending and real GDP assuming a constant price level Key concept: in any particular year, the level of GDP is determined by the level of aggregate expenditure o Aggregate Expenditure = Consumption + Planned Investment + Government Purchases + Net exports Or AE = C + I + G + NX o Difference between planned investment and actual investment Actual investment = planned investment only when there is no unplanned change in inventories (unsold goods) o Macroeconomic equilibrium Aggregate Expenditure = GDP = Macro Equilibrium Relationship between AE and GDP If o AE = GDP then inventories are unchanged and the economy is in macroeconomic equilibrium o AE is less than GDP then inventories rise and GDP and employment decrease o AE is greater than GDP then inventories fall and GDP and employment increase Determining the Level of Aggregate Expenditures in the Market o Consumption: Current disposable income = income after taxes + transfer payments Household wealth = assets - liabilities Expected future income Basically, a limiter that current income can variate – expected future income is the mean expected income of sorts The price level CPI The interest rate Real vs. nominal
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Exploring Macroeconomics
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Chapter 6 / Exercise 8a
Exploring Macroeconomics
Sexton
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Implications for durable goods – less demand when interest rates are high The consumption function: relationship between consumption spending and disposable income Marginal propensity to consume: slope of the consumption function and effectively the amount of each additional dollar earned that will be spent o For example – if you make $1 and you spend 97 cents and save cents, then your MPC = .97 o MPC = (change in consumption / change in disposable income) Relationship between consumption and national income Disposable income = national income – net taxes National Income = GDP = Disp. Income + Net Taxes Income, Consumption, and Saving National Income = Consumption + Savings + Taxes o A change in NI then has a corresponding change in C, S, and T o Change in NI = Change in C + Change in S + Change in T Marginal Propensity to Save o Same thing and idea as marginal propensity to consume, but for savings o MPC + MPS = 1 o Planned Investment Expectations of future profitability Optimism and pessimism impact planned outflows The interest rate Higher interest rates mean more expensive to borrow so investment goes down Taxes Investment tax incentives encourage investment Cash flow Difference between cash revenues received by a firm and the cash spending by a firm o Government purchases = Federal + State/Local o Net exports X-M Three key variables: Comparative price levels between countries o

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