Unit 3: National Income and Price Determination

• marginal propensity to consume (MPC): the fraction of any change in disposable income spent for consumer goods; equal to the change in saving divided by the change in disposable income
• marginal propensity to save (MPS): the fraction of change in disposable income that households save; equal to the change in saving divided by the change in disposable income
• spending multiplier: the number by which a change in any component of aggregate expenditures or aggregate demand must be multiplied to find the resulting change in the equilibrium GPD
• consumption function: mathematical formula by John Maynard Keynes designed to show the relationship between real disposable income and consumer spending, the latter variable being what Keynes considered the most important determinant of short-term demand in an economy
• inventories 


  goods that have been produced but remain unsold
• inventory investment: part of GDP that is the difference between goods produced (production) and goods sold (sales) in a given year
• interest rate effect: the tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy and vice-versa
• sticky wages: some wages adjust slowly in response to labor market shortages or surpluses; a key reason underlying the positive slope of the short-run aggregate supply curve.
• short run aggregate supply: aggregate supply relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level
• long run aggregate supply: the aggregate supply associated with a time period in which input prices (especially nominal wages) are fully responsive to changes in the price level
• potential output: the real output (GDP) an economy can produce when it fully employs its available resources
• AD-AS model: uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output
• long run macroeconomic equilibrium: period of time in which all prices, especially wages, are flexible and have achieved their equilibrium levels
• recessionary gap: the amount by which the aggregate expenditures schedule* must shift upward to increase the real GDP to its full-employment, noninflationary level
• inflationary gap: the amount by which the aggregate expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary level
• self correcting: shifts of the short-run aggregate supply curve caused by changes in wages and other resource prices; acts to close a recessionary gap with lower wages and an increase in the short-run aggregate supply curve
• stabilization policy: a package or set of measures introduced to stabilize a financial system or economy through the business cycle and response to economic crises
• average propensity to consume (APC): ratio of consumption expenditures to (c) to disposable income (DI)
• average propensity to save (APS): ratio of savings (S) to disposable income (DI)
• personal savings: part of after-tax (disposable) income not consumed
• disposable income: most significant factor in nation's consumption and saving
• dissaving: consuming of disposable income through debt and dipping into savings
• break-even income: income level where households plan to consume entire income

  C = DI

  disposable income (DI) consumption (C)