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CHAPTER 12: Consumption, Real GDP, and the Multiplier (12.1 Determinants…
CHAPTER 12: Consumption, Real GDP, and the Multiplier
12.1
Determinants of Planned Consumption and Planned Saving
Real Disposable Income
= Real GDP - net taxes (or after tax real income)
Consumption:
spending on new goods and services out of a household's current income.
Whatever is not consumed is
saved:
the act of not consuming all of one's income, an act measured over time (a flow), as well as a stock
Consumption goods:
goods bought by households to use up, such as for food and movies
Investment:
business spending on items that can produce future goods and services.
Such as machines and buildings.
Capital goods:
Nonconsumable goods used to make other goods.
Autonomous Consumption
Consumption that is independent of the disposable income level.
45-Degree Reference Line:
The line along which planned real expidentures = real GDP per year
Consumption function
Relationship between amount consumed and disposable income. Indicates how much people plan to consume.
Dissaving
Negative saving; spending exceeds income.
Consumption Theories
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.
Propensities
Average Propensity to Consume (APC):
The proportion of total disposable income that's consumed
Net wealth:
the stock of assets owned by a person, household, firm, or nation (net of any debts owed).
12.2
Determinants of Investment
& 2.3
Determining Equilibrium Real GDP
Investments consist of expenditures on new buildings and equipment.Gross private domestic investment has been volatile.
GDP = C +
I
+ G + X
Unplanned business inventory drops cause an increase in the production of goods and increasing of employment
12.4
Keynesian Equilibrium with Government
and the Foreign Sector Added
Government (G):
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.
Autonomous
- independent of real national income.