ECON 201 Chapter Notes - Chapter 12: Real Interest Rate, Cash Flow, Consumption Function

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Chapter 12: Income and Expenditure
AE: total spending in economy
Aggregate expenditure model: focuses on relationship between total spending and real GDP in
the short-run, assuming price level is constant
Inventories: goods that have been produced but not sold
Determinants of consumption:
Current disposable income,
Household wealth,
Expected future income,
Price level
Interest rate
Consumption function: relationship between consumption and disposable income
Marginal propensity to consume (MPC): change in consumption/ change in disposable income
Marginal propensity to save (MPS): change in saving/ change in disposable income
Determinants of planned investment:
Expectations of future profitability
Real interest rate
Cash flow: difference between cash revenue received by a firm and the cash spending by a firm
Determinants of government purchases:
Spending by federal government and local and state government for goods and services (not
including transfer payments such as social security or pension)
Determinants of net exports:
Change in price levels in US relative to other countries
Growth rate of GDP in US ditto
Exchange rate between dollar and other currencies
45 degree line: where AE=GDP
Autonomous expenditure: spending not determined by level of GDP (not caused by change in
income) → this kind of change will cause rounds of induced change in expenditure, so an
autonomous change has a multiplier effect on equilibrium GDP
Induced change: change in expenditure caused by change in income
Multiplier effect: process by which increase in autonomous expenditure leads to larger increase
in GDP
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