CHAPTER 12: Consumption, Real GDP, and the Multiplier (12.1 Determinants…
CHAPTER 12: Consumption, Real GDP, and the Multiplier
Determinants of Planned Consumption and Planned Saving
Real Disposable Income
= Real GDP - net taxes (or after tax real income)
spending on new goods and services out of a household's current income.
Whatever is not consumed is
the act of not consuming all of one's income, an act measured over time (a flow), as well as a stock
goods bought by households to use up, such as for food and movies
business spending on items that can produce future goods and services.
Such as machines and buildings.
Nonconsumable goods used to make other goods.
Consumption that is independent of the disposable income level.
45-Degree Reference Line:
The line along which planned real expidentures = real GDP per year
Relationship between amount consumed and disposable income. Indicates how much people plan to consume.
Negative saving; spending exceeds income.
Life Cycle Theory of Consumption:
When an individual anticipates a higher future income, s/he will consume more and save less in the present.
Permanent Income Hypothesis:
If a person's flow of income temporarily rises without a rise in average lifetime income, the person saves more but consumes the same amount.
Average Propensity to Consume (APC):
The proportion of total disposable income that's consumed
the stock of assets owned by a person, household, firm, or nation (net of any debts owed).
Determinants of Investment
Determining Equilibrium Real GDP
Investments consist of expenditures on new buildings and equipment.Gross private domestic investment has been volatile.
GDP = C +
+ G + X
Unplanned business inventory drops cause an increase in the production of goods and increasing of employment
Keynesian Equilibrium with Government
and the Foreign Sector Added
Federal, state, and local.
Does not include transfer payments - is autonomous - lump-sum taxes = G
Lump sum tax:
A tax that doesn't depend on income or taxpayer circumstances.
Foreign Sector (X):
Net exports (X) equals exports minus imports. Depends on international economic conditions.
- independent of real national income.