Unit 3 Review

3: AGGREGATE EXPENDITURES
VOCABULARY (with some additional terms)
Aggregate Expenditures – total spending
Consumption Schedule – direct relationship between consumption and disposable income
Saving Schedule – direct relationship between disposable income and savings
Liquidation – selling for cash
Break-even Income – income level at which households plan to consume their entire incomes (C = DI)
Average Propensity to Consume (APC) – fraction/percentage of total income that is consumed
Average Propensity to Save (APS) – fraction/percentage of total income that is saved
Marginal Propensity to Consume (MPC) – fraction/percentage of change in income consumed
Marginal Propensity to Save (MPS) – fraction/percentage of change in income saved
Wealth Effect – reduced savings and increased spending as income increases (shifts savings schedule
downward and consumption schedule upward)
Expected Rate of Return – what a machine’s efforts bring as profits after costs have been accounted for
Real Interest Rate – nominal rate minus the rate of inflation
Investment Demand Curve – inverse relationship between interest rate and the quantity of investment
Planned Investment – amount firms plan to invest
Investment Schedule – amount firms plan to invest according to different levels in real GDP
Aggregate Expenditures Schedule – amount of spending done at each possible output or income level
Equilibrium GDP – AE = GDP
Leakage – withdrawal of spending
Injection – spending or investment
Unplanned Changes in Inventories – changes in inventories firms did not anticipate
Actual Investment – planned investment plus unplanned increase/decrease in inventories
Multiplier – a value that determines how much larger a certain change is magnified
Net Exports – exports minus imports
Lump-sum Tax – tax of a constant amount that does not change in revenues at each level of GDP
Balanced-budget Multiplier – extent to which an equal change in government spending and taxes
changes equilibrium GDP, always has a value of 1 because it is equal to the amount of changes in G and
T
Recessionary Gap – amount by which aggregate expenditures at full employment GDP fall short of
required to achieve full employment GDP
Inflationary Gap – amount by which aggregate expenditures at full employment GDP exceed required to
achieve full employment GDP
CHAPTER 9
AGGREGATE EXPENDITURES – economy’s total spending, developed by John Maynard Keynes
Basic premise of AE model (Consumption Function graph) states that the amount of goods and
services produced depends directly on level of AE. The graph is relationship between consumption
and savings
SAY’S LAW – consumption creates production
AE falls, total output (GDP) and employment decrease
SAVINGS – “not spending”, part of DI not consumed
Savings = DI – C
Consuming more than DI results in “dissavings”, spending using funds from bank
We are able to calculate how much the economy saves and spends using APC, APS, MPC and MPS
APS = savings / income
APC = consumption / income
MPS = ΔS/ΔI
MPC = ΔC/ΔI
APS + APC = MPS + MPC = 1