ISBN-13 9781319120085
446 Flashcards & Notes
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• ## 11 Income and Expenditure

• What are the assumptions of the multiplier on consumer spending
1. Producers are willing to supply output at a fixed price
2. interest rates is given
3. no government spending and no taxes
4. exports and imports are zero
• What do we mean for business and consumers spending an additional dollar when we say producers willing to supply additional output at a fixed price
When consumers or businesses buying investment goods decide to spend an additional dollar, it will translate into the production of an additional value of goods and services without inflation, or a rise in the overall price.
• What will happen to changes in aggregate expenditure as a result of the supply of additional output being fixed
As a result, of the supply of additional output being fixed changes in aggregate expenditure translate into changes in aggregate output, as measured by real GDP.
• Waht will happen if investment spending increases, by what amount  will aggregate output increase and why? What will happen to household income when the aggregate output increases
• This will increase income and the value of aggregate output by the same amount.
• This is because each dollar spent on a good, and distributed as income to its factor input (wages)
• when the aggregate output increases, household disposable income increases in the form of wages and profits.
• this leads to a rise in consumer spending which leads firms to increase output
• Again with the rise in firms output, a rise in wages and a rise in a rise in consumer spending.
• Therefore the increase in the investment on a good will raise the overall income, leading to a rise in aggregate output.
• How do we calculate the total effect on aggregate output if we sum the effect from all these rounds of spending increases? What multiplier do we use? What do you call whatever you don't spend? And what is the formula? What is the total rounds of increase equal to?
• To calculate  the total effect on aggregate output if we sum the effect from all these rounds of spending increases we need know the Marginal Propensity to consumer.
• MPC is the change in consumer spending when disposable income rises or falls. MPC = Δ  Consumer spending/﻿ Δ  Disposable income
• This MPC is between 0 and 1
• Whatever you don't spend is your marginal propensity to save or MPS or 1-MPC
• So the total effect on aggregate output when the rounds of spending increases is measured by
• Total increase in real GDP = ( 1+MPC+MPC^2+MPC^3 + … ) × \$ dollar rise in real GDP  or
• I =(1/MPC)\$ dollar rise in real GDP
• What is the reason that the total real GDP is limited to a number even if income increases, why dont we spend all the money, why is there decreasing returns to scale in spending when the is increase in income?
• That is because at each stage of expansion, as disposable income rises so of the income gets leaked out because it is saved.
• How much of an addtional income dollar of disposable income is saves depends what? And what is that?
The Marginal propensity to save MPS
• What leads to a rise in consumer spending and a rise in real GDP (wealth effect)?
An increase in asset  prices makes owners feel richer therefore the spend more.
• What does self governing mean in the context of autonomous change in  expenditure? And what is autonomous change in  expenditure?
• it means that the rise in consumer spending is the cause of the rise in real GDP not that effect not the result of it.
• the initial rise in consumption occurs first and then it is followed by the rise in real GDP.
• What is the importance of multiplier effect? what does the size of the multiplier depend on? And why? Formula?
• we use it to determines how large each round of expansion is compared to the previous round, by applying the size of the MPC to determin that ratio
• It is the ratio of the total change in real GSP caused by an autonomous change in aggregate expenditure
• the size of the multiplier depends on the autonomous change in aggregate expenditure.
• multiplier= change in Y/change in AE = 1/(1-MPC)
• Y is real GDP, AE autonoumous expenditure.
• Formula for change in real GDP
• change in Y= 1/(1-MPC)*change in AE
• Y is real GDP, AE autonoumous expenditure
• What determines how much saving occurs
The higher the MPC the higher less disposable income leaks out into savings.
• In what situations do the formula for the multiplier change?
When taxes and foreign trade is introduced.
• ## 11.2 Consumer Spending

• How important are consumption decisons
Come back here
• ## 11.2.1 Current Disposable Income and Consumer Spending

• What determins a families consumer spending
Its current disposable income after taxes are paid and transfers are received
• What is the equation that represents the relationship between disposable income and consumer spending. And what is its formula?
the individual consumption function
C=ac+ MPC*yd
where
the lower case indicated that it is for an individual houseld
C is the individual consumer spending
ac is the autonomous consumer spending and ac is greater than zero
yd is the individual household disposable income
• Why do assume that autonomous consumer spending as greater than zero even though there is expenditure?
This is because a household with no disposable income is able to fund some consumption by borrowing and saving.
• Cahnge in consupmtion foor an individual household formula?
Is the MPC * change in individual household disposable income
• What is the slope of a consumption function
Change on c/ change in yd
it is upward sloping?
• Why is the consumption function upward sloping
It is upward sloping showing that housholds with higher surrent disposable income had higher consumer spending.
• What is the Macroeconomic realtionship between disposable income and consumer spending
The Aggregate consumption function
• How does the aggregate consumption function differe from the normal consumption function? Formula?
The aggregate consumption function applies for the economy as a whole
C= AC +MPC* YD
where
the UPPER case indicated that it is for the whole economy
C is the aggregate consumer spending
AC is the autonomous consumer spending and AC is greater than zero or the amount of consumer spending when YD =0
YD is the aggregate disposable income
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What is the stage that make conducting macroeconomic policy difficult?
There are three lags that happen between when a inflation or recession happens and when we figure out what the impact of the law has been: or the end process
Which policy has an impact that is soon realized? And why?
The fiscal policy is much faster  to see the impact than monetary policy
becasue it takes time for firms to adjust to the new money supply
What do we call the time it takes to realize the highest effect of the policy in effect?
Impact lag
Which policy could be quickly implemented? Why?
Monetary policy could be implemented quicker than fiscal policy
because changing the money supply is much easier by setting the overnight rate target, but fiscal policy needs more time for approval and implementation.
How long could it take for a policy to be implemented?
More than a year
What do we call the time when the recession or inflation is discovered but there is a significant time before for it is possible to act?
Implementation lag
What do we call the time it takes monetary and fiscal policies to figure out the recession or inflation is happening
The recognition lag
What are the three stages of lags in the economy?
• Recognition Lag
• Implementation Lag
• Impact Lag
What are the two problems to policies?
Coordination between fiscal authorities and monetary authorities
Lags
What happens to interest rates if the money demanded is less than the money supplied  (so to the left of the vertical line)? People holdings of money
• At this point people want to hold less money than they want to save
• quantity of money demanded is less than quantity of money supplied
• quantity of interest bearing assets demanded is greater than quantity of interest bearing assets supplied
• because quantity of interest bearing assets demanded is greater than quantity of interest bearing assets supplied those selling nonmonetary assets find can offer lower interest rates and still find buyers
• so the interest rate decreases until the MD=MS