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Chapter 8

Chapter 8 Spending and Output in the Short Run

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ECON 1100
Eveline Adomait

Chapter 8: Spending and Output in the Short Run Saturday, February 2, 201312:03 PM 8.1 The Keynesian Model's Crucial Assumption: Firms Meet Demand at Present Prices Definitions Menu Costs- the cost of changing prices 8.2 Planned Aggregate Expenditure Definitions Planned Aggregate Expenditure (PAE) - total planned spending on final goods and services Consumer Expenditure ( C) - spending by households on final goods and services Private Sector Investment (I) - spending by firms on new capital goods, such as office buildings Government Purchases (G) - refers to government spending (all levels) on final goods and services Net Exports (NX) - equals exports minus imports Disposal Income- refers to income that includes the addition of transfers and the deduction of taxes Net Taxes- refers to taxes minus transfers Consumption Function- the relationship between consumption spending and its determinants, such as disposable (after tax and transfer) income Wealth Effect- the tendency of changes in asset prices to affect households' wealth and thus their spending on consumption goods and services Asset Price Bubble- occurs when the price of a financial or real asset or asset category rises much more rapidly than prices in general and by much more than can be explained by fundamental factors Marginal Propensity to Consume (MPC) - the amount by which consumption rises when disposable income rises by $1, we assume that Average Propensity to Consume (APC) - consumption divided by disposable income Autonomous Expenditure-
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