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Say's Law
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Theory that supply creates its own demand
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Consumption function
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Goods and services at different levels of disposable income
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Dissaving
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Amount personal consumption exceeds disposable income
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Autonomous Consumption
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Independent of disposable income
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Saving
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Disposable income households do not spend on goods and services
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MPC
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Marginal Propensity to Consume - change in consumption from real disposable income = Change C/change in disposable income
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MPS
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Marginal Propensity to Save - change in saving from real disposable income = change S/change in disposable income
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MPC + MPS =
answer
1 ALWAYS
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Autonomous Expenditure
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Spending that does not vary with disposable income - zero disposable income
question
AE
answer
Aggregate expenditures = total spending in an economy
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Classical economics
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Recession will naturally be eliminated by the price system - full employment in long run
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Movement along consumption function caused by
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Change in real GDP
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Shift in investment demand curve rightward caused by
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Decrease in business taxes
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Causing outward shift in firm's investment demand
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Expectations of higher future profitability
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Title of Keynes' book
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General Theory of Employment, Interest and Money
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Shifts the consumption function upward
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Increase in consumer wealth
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Consumption function slope is
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Positive
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Pessimism about economy shifts consumption function
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Upward
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Firms increase investment then Aggregate expenditures function will shift
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Upward
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Spending multiplier
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Ratio of change in real GDP 1/1-MPC or 1/MPS also applies to investment spending by businesses
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Recessionary gaps
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Amount AE fall short of amount to achieve full-employment equilibrium
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Inflationary gap
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Amount AE exceeds amount to achieve full-employment equilibrium
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Tax multiplier
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Change in AE from initial change in taxes
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AE=
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C+I+G+(X-M)
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If AE>GDP then
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Inventory is depleted
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If economy operates above equilibrium GDP then
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Unplanned inventory accumulation, decrease in GDP, decrease in employment
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Tax increase causes an
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Downward shift in AE curve
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AE is above the 45 degree line at full-employment GDP
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inflationary gap
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If MPC shrinks then
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Larger increase in autonomous AE shifts equilibrium real GDP downward
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An increase in gov't spending causes
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Upward shift in AE curve
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If AE are less than GDP then
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GDP decrease
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Increase in MPC leads to
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Increase in spending multiplier
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Increasing transfer payments is one option to eliminate
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Recessionary gap
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Decreasing transfer payments is one option to eliminate
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Inflationary gap
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Keynesians accept countercyclical policy of doing nothing
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Allowing market forces to work
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Investment spending increases with
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More optimistic business expectations
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