econ wk 5 - MPC(Marginal Propensity to consume)- MPC is...

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Unformatted text preview: MPC(Marginal Propensity to consume)- MPC is equal to ratio of change in consumption divided by the change in income and is the slope of consumption function and the aggregate expenditure line. // MPC is the additional income that is spent on consumption and it affects the value of the expenditure supplier. Expenditure Multiplier: the expenditure multiplier is equal to 1/(1-MPC) and it measures the change in equilibrium output for given change in autonomous expenditure. Equilibrium: when planned investment is equal to actual investment the economy is at equilibrium and there is no change in inventories. When planned investment is less than actual investment total output in the economy exceeds total spending and inventories pile up while production is curtailed due to lack of demand. When aggregate expenditure fall short of real GDP, unsold goods end up in inventories. Such increase in inventories motivate producers to reduce production in future time periods. Aggregate income will decline inventories motivate producers to reduce production in future time periods....
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This note was uploaded on 10/13/2011 for the course ECON 001 at Cornell University (Engineering School).

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econ wk 5 - MPC(Marginal Propensity to consume)- MPC is...

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