CLEP Macro Economics

# Helps track expansions and contractions in the

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Helps track expansions and contractions in the business cycle Also referred to as the leakage and injection analysis Leakages – savings, taxes and imports are considered leakages’ in the aggregate expenditure (AE) model, and cause a downward shift in the AE curve Spending is the opposite of leakage in the AE model, and causes an upward shift in the curve Leakage and injection analysis can be analyzed mathematically o C + lg + G + Xn = AE Government Spending (G) – component of aggregate expenditure model By performing a leakage and injection analysis, the effect that AE will have on GDP can be seen Money Multiplier – helps determine the exact relationship between changes in aggregate expenditure (total output of goods and services demanded) and GDP (total production of output); this concept shows the change in GDP for an initial spending level Can also be understood as 1 / (MPS) Marginal Propensity to Save 1 / (1-MPC) Marginal Propensity to Consume Marginal Propensity to Consume (MPC) – is a measurement that evaluates the increase in a person’s spending that occurs when disposable income increases Measures the increase in spending (consumption) that occurs with a increase in income o Example : Sally receives a \$500 per week raise and spends \$250 of her raise per week, the MPC is .5 (\$250/\$500) Same as Average Propensity to Consume (APC) Marginal Propensity to Save (MPS) – is a measurement that evaluates the increase in a person’s savings that occurs when disposable income increases Measures the increase in savings that occurs with a increase in income o Example : Sally receives a \$500 per week raise and saves \$250 of her raise per week, the MPC is .5 (\$250/\$500) Same as Average Propensity to Save (APS) o Amount saved / amount of Income Marginal Product – the extra production that comes from adding that worker Organizations will only hire workers if the value of the marginal product exceeds the real wage that the organization must pay the worker Rule of 70 – states that the years it will take for a variable, such as investments or GDP, to double can be calculated by the following formula: 70 / annual growth rate of the variable o Example: if Bob invests his money and receives a 10% return on his money, his money will double in 7 years. 70 / 10 = 7 o Example: ABZ nation is growing at 5% per year, it will take 14 years for this nation’s GDP to double their growth rate 70 / 5 = 14 years When interest rates increase in the U.S., imports will increase and exports will decrease

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High interest rates will lead to a decline in aggregate supply Discourage business investment, which leads to less inventory and production Aggregate Supply Curve (AS) – is a graph or illustration that depicts the number of goods that will sell at a given price AS curve is an indication of amounts or goods or services that sellers are willing to sell based on opportunity cost Economic Efficiency –Full Employment and Full Production must be achieved to be in the state of economic
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Helps track expansions and contractions in the business...

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