6 - macro econ

• Desired expenditure


  What consumers and firms would like to purchase, given their real-world constraints of income and market prices
• Autonomous expenditures

  Elements of aggregate expenditure that do not change systematically with national income
• Induced expenditures

  Components of aggregate expenditure that do change systematically in response to changes in national income
• The simplest short-run macro model assumes: no trade with other countries, no government, and constant price level
• Disposable income

  Household income minus taxes
• Consumption function

  The relationship between desired consumption expenditure and all the variables that determine it
• Consumption function

  • Determined by: disposable income, wealth, interest rates, and expectations about the future

  
• Average propensity to consume (APC)

  C / YD
• Marginal propensity to consume (MPC)


  ΔC / ΔYD
• Average propensity to save (APS)

  S / YD
• Marginal propensity to save (MPS)

  ΔS / ΔYD
• APC + APS = 1
• MPC + MPS = 1
• Determinants of desired investment expenditure

  • Real interest rate, changes in the level of sales, and business confidence
• The current level of real GDP is not an important determinant of current desired investment
• Aggregate expenditure (AE) function

  Relates the level of desired aggregate expenditure to the level of actual national income
• In the absence of government and international trade, desired aggregate expenditure is equal to desired consumption plus desired investment
• Equilibrium national income

  The level of national income where desired aggregate expenditure equals actual national income
• If desired aggregate expenditure exceeds actual income

  Inventories are falling and there is pressure for actual national income to rise
• If desired aggregate expenditure is less than actual income

  Inventories are rising and there is pressure for actual national income to fall
• Simple multiplier

  The ratio of the change in equilibrium national income to the change in autonomous expenditure that brought it about, calculated for a constant price level
• In the simple macro model, the multiplier is greater than 1
• Households' and firms' expectations about the future state of the economy

  Influence desired consumption and desired investment
• Changes in desired aggregate expenditure will, through the multiplier process, lead to changes in national income
• Expectations about a healthy economy can actually produce a healthy economy - a self-fulfilling prophecy
• When writing the actual value of expenditures an "a" subscript is used
• “Desired” expenditure is not just a list of what consumers and firms would buy if they had no constraints on their spending—it is much more realistic than that.
• Desired expenditure is what consumers and firms would like to purchase, given their real-world constraints of income and market prices.
• The sum of desired or planned spending on domestic output by households, firms, governments, and foreigners is desired aggregate expenditure
• desired aggregate expenditure: AE = C + I + G + (X − IM)
• Elements of aggregate expenditure that do not change systematically with national income are called autonomous expenditures.Elements of aggregate expenditure that do not change systematically with national income
• Elements of aggregate expenditure that do not change systematically with national income

  autonomous expenditures
• induced expenditures

  Components of aggregate expenditure that do change systematically in response to changes in national income
• Saving ‒ disposable income not spend on consumption
• Desired consumption is determined by: disposable income, wealth, interest rates, and expectations about the future
• The MPC is the slope of the consumption function.
• The constant slope of the consumption function shows that the MPC is the same at any level of disposable income.
• Saving Function

  Households decide how much to consume and how much to save.
• The consumption function shifts upward with an increase in wealth, a decrease in interest rates, or an increase in optimism about the future
• The saving function shifts downward with an increase in wealth, a decrease in interest rates, or an increase in optimism about the future.