Macro 2
THE GOODS MARKET
THE GOODS MARKET
Set of flashcards Details
| Flashcards | 12 |
|---|---|
| Language | English |
| Category | Macro-Economics |
| Level | University |
| Created / Updated | 22.05.2013 / 30.05.2013 |
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Consumption - Investment - government spending
• Consumption (C) refers to the goods and services purchased by consumers. • Investment (I), sometimes called fixed investment, is the purchase of capital goods. It is the sum of non-residential and residential investment. • Government Spending (G) refers to the purchases of goods and services by the federal, state and local governments. It does not include government transfers, nor interest payments on the government debt.
Total demand for goods
Z = C + I + G + X - IM
(Assumption: All firms -> same good)
Disposable income
Income that remains once consumers have paid taxes and received transfers from the government. (Y D)
YD = Y -T
marginal propensity to consume (c1)
The effects of an additional dollar of disposable income on consumption.
fiscal policy (government spending)
The choice of taxes and spending by the government.
G & T are exogenous why? (2)
- Governments do not behave with the same regularity as consumers or firms.
- Macroeconomists must think about the implications of alternative spending and tax decisions of the government.
Determination of equilibrium output
- Production as a function of income
production = income - Demand as function of income
- slope c1 (less than 1) - In equilibrium: Production = Demand
Effects of increase in autonomous spending on output
1. AB ⇒ increase in demand
⇒ increase in production
⇒ (1 billion)
BC ⇒ increase in income
2. CD ⇒ increase in demand
⇒ (1 billion * c1)
⇒increase in production
DE ⇒ increase in income (equal to CD)
3. Increase in demand
(c1billion)*c1
forecast error
Difference between the actual value of GDP and the value that had been forecast by economists one quarter earlier.
consumer confidence index
Computed from a monthly survey of about 5,000 households who are asked how confident they are about both current and future economic conditions.
Saving
Sum of private and government savings.
paradox of saving
When people attempt to save more, the result is both a decline in output and unchanged saving.
