Chapter 27 – EXPENTITURE KENYSIAN RULE
For economy: price level is fixed, aggregate demand determines real GDP
Aggregate demand expenditure is equal to the sum of the planned levels of consumption expenditure,
investment, gov expenditure, exports minus imports.
Two way link between agg expenditure and real GDP.
An increase in real GDP increase aggregate expenditure
An increase in aggregate expenditure increases real GDP
Consumption expenditure factors: Disposable income, Real interest rate, Wealth, Expected future
Consumption function is the relationship between consumption expenditure and disposable income.
Saving function is the relationship between saving and disposable income.
Marginal propensity to consumer is the fraction of a change in disposable income that is spent on
MPC = CHANGE IN C (CONSUMPTION EX.) / CHANGE IN YD (DISPOSIBLE INCOME)
Marginal propensity to save is the fraction of change