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Chapter 11 Summary

Chapter 11 Summary - Chapter 11 Summary An autonomous...

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Chapter 11 Summary - An autonomous change in aggregate spending leads to a chain reaction in which the total change in real GDP is equal to the multiplier times the initial change in aggregate spending. The size of the multiplier, 1/(1-MPC), depends on the marginal propensity to consume (MPC) the fraction of an additional dollar of disposable income spent on consumption. The larger the MPC, the larger the multiplier and the larger the change in real GDP for any given autonomous change in aggregate spending. The marginal propensity to save (MPS) is equal to 1-MPC - The consumption function shows how an individual household’s consumer spending is determined by its current disposable income. The aggregate consumption function shows the relationship for the entire economy. According to the life-cycle hypothesis, households try to smooth their consumption over their lifetimes. As a result, the aggregate consumption function shift in response to changes in expected future disposable income and changes in aggregate wealth. - Planned investment spending depends negatively on the interest rate and on existing production
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