Essay Econ Exam Study Guide #3

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Chapter 10 ~Y(GDP) = C(consumption) + Ig(gross investment) + G(government purchases) + Xn (Net exports) GDP Equation is an “Identity If household only sector GDP=Y=C ~DI(disposable income)= C(consume)+S(save) DI is either income that households will consume or save] DI has a direct relationship with C & S (- value saving= dissaving, 0 value=breakeven) ~Consumption function (Relationship between total consumer expenditure(y) & total disposable income(x) the two are linear dependent) (C= f(DI)) If linear y=a+bx or C=a+b(DI) (a & b constants for slope and y-intercept) Consumption Schedule[direct relationship between aggregate consumption and aggregate income][Most important determinant of c & s is level of income] ~Marginal Propensity to Consume(MPC)=∆C/∆DI also the slope of consumption function [Proportion of a change in income consumed][MPC greater than 0 less than 1(assumed value)] ~Marginal Propensity to Save(MPS)=∆saving/∆income MPC+MPS=1 [Proportion of a change in income saved][MPC+MPS=APC+APS] [MPS&MPC constant as income changes] ~Average Propensity to Consume(APC)=consumption/income [Fraction of total income consumed] ~Average Propensity to Save(APS)=saving/income [Fraction of total income saved] APC+APS=1 [APC & APS variable as income changes]

~Nonincome determinants [other determinants and shifts in income schedule] wealth^ consumption^, burrowing more^ consumption^, Expectations of higher prices tomorrow consumption^ today, Real interest rates Interest Rates down Consumption^]

~Multiplier Effect-[Multiplier and MPC directly related: Large MPC=Larger increases in spending][Multiplier and MPS inversely related: Large MPS= Smaller increases in spending][Multiplier= 1/1-MPC = 1/MPS]

Chapter 11 ~Aggregate Expenditure Model[ Prices are fixed, Private closed economy- households and businesses, AE=GDP when plan investment = savings][GDP=DI=C+I] [Saving=y-c, AE=C+I, +-=y-AE]

~Adding International Trade [Include IT in AE, Private open economy, Exports create production, employment & income][Subtract spending on imports, Xn can be + or -] ~International Linkages [Prosperity abroad=^US
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