DSST Money & Banking Part 1

Permanent income the present value of expected income

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Permanent income:  the present value of expected income over the lifetime of the individual. Modern Theory implies that velocity is procyclical:   due to current income levels relative to permanent income  levels – not interest rates. Macro General Equilibrium Analysis: Aggregate Demand and Supply:  Product market refers to goods and services Consumption goods (C ^ ):  the actual amount of goods and services produced for personal consumption  (apples, shoes, etc) Gross Private Domestic Investment Goods GPDI (I ^ ):  the actual amount of new private capital  produced – included plant and equipment, changes in inventories, and new residential construction Government Purchases of Goods and Services (G ^ ):  actual amount of goods and services produced  for state, local, and federal governments, but NOT ALL SPENDIG as it does not included transfer  payments like unemployment or S.S. Exports (E^):  actual amount of goods and services produced for use outside U.S. Total Aggregate Output of US (Total Domestic Production (X)) is the sum of the above:  X =  C+I+G+E X is known as GNP (Gross National Product):  total market value of all final goods and services  produced in the economy during a year. Aggregate Income (Y):  the gross, total value of income earned in the production of GNP.  Aggregate  income equals the value of aggregate output. Aggregate Demand (AD):  the schedule of total amount of planned expenditures on goods and services  at the various income levels: AD = C+I+G+NC, where C is personal consumption demand, I is investment  demand, G is government demand, and NX is net export demand.  The terms planned, desired, ex ante,  and intended are interchangeable. Exogenous variable:  A variable whose value does not depend on the values of other economic  variables. Endogenous variables:  A variable whose value DOES depend on the values of other economic  variables.  Consumption and Investment spending are this type since their values depend on income and  interest rates. Autonomous Consumption:  Amount of consumption spending that is independent of income. Induced Consumption:  amount of consumption spending that varies with the level of income.
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Marginal Propensity to consume (mpc):  The slope of the consumption function which equals the  additional consumption spending per additional dollar of disposable income Disposable Income (X D ):  Amount of income available for spending by consumers = earned income plus  unearned income minus taxes.
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