|
| QUICK REVIEW 9-1 |
|
- Classical macroeconomics was grounded in Say's
law
which asserted that supply creates its own demand and therefore underspending leading
to recessions was unlikely.
- The Great Depression and Keynes' development of
an alternative model of the macroeconomy undermined classical macroeconomics and led to
the modern aggregate expenditures theory.
- In the aggregate expenditures model
the level of
total or aggregate expenditures determines the amount of output produced which in turn
establishes the level of employment.
|
| QUICK REVIEW 9-2 |
|
- Consumption spending and saving both rise when
disposable income increases; they fall when disposable income decreases.
- The average propensity to consume (APC) is the
fraction of any specific level of disposable income which is spent on consumer goods; the
average propensity to save (APS) is the fraction of any specific level of disposable
income which is saved. The APC falls and the APS rises as disposable income increases.
- The marginal propensity to consume (MPC) is the
fraction of any change in disposable income which is consumed and is the slope of the
consumption schedule; the marginal propensity to save (MPS) is the fraction of any change
in disposable income which is saved and is the slope of the saving schedule.
- Changes in consumer wealth
consumer
expectations
household debt
and taxes can shift the consumption and saving schedules.
|
| QUICK REVIEW 9-3 |
|
- A specific investment will be undertaken if the
expected rate of return
r
equals or exceeds the real interest rate
i.
- The investment demand curve shows the total
monetary amounts which will be invested by an economy at various possible real interest
rates.
- The investment demand curve shifts when changes
occur in (a) the costs of acquiring
operating
and maintaining capital goods
(b)
business taxes
(c)
technology
(d) the stock of capital goods on hand
and (e) business
expectations.
|
| QUICK REVIEW 9-4 |
|
- In a private closed economy
equilibrium GDP
occurs where aggregate expenditures equal real domestic output (C 1 I 5 GDP). g
- Alternatively
equilibrium GDP is established
where saving equals planned investment (S 5 Ig).
- Actual investment consists of planned investment
plus unplanned changes in inventories and is always equal to saving in a private closed
economy.
- At equilibrium GDP
changes in inventories are
zero; no unintended investment or disinvestment occurs.
|
|
