ECON2 REVIEWER

Aggregate Demand
In macroeconomics, aggregate demand (AD) or domestic final demand (DFD)
is the total demand for final goods and services in an economy at a given time. It
specifies the amounts of goods and services that will be purchased at all possible
price levels.
Aggregate Income
Aggregate income is the combined income earned by an entire group of
persons. 'Aggregate income' in economics is a broad conceptual term. It may
express the proceeds from total output in the economy for producers of that
output.
Autonomous Consumption spending
The minimum level of consumption that would still exist even if a consumer
had absolutely no income. This contrasts with discretionary consumption, which
is used for non-essential it

1
2

Consumption Function
The consumption function is a mathematical formula laid out by famed
economist John Maynard Keynes. The formula was designed to show the
relationship between real disposable income and consumer spending, the latter
variable being what Keynes considered the most important determinant of shortterm demand in an economy.
Consumptionfunctionexpressesthelevelofconsumerspendingdependingonthree
factors.
Yd=disposableincome(incomeaftergovernmentinterventione.g.benefits,andtaxes)
a=autonomousconsumption(consumptionwhenincomeiszero.(e.g.evenwithno
income,youmayborrowtobeabletobuyfood))
b=marginalpropensitytoconsume(the%ofextraincomethatisspent).Alsoknownas
inducedconsumption.
Equilibrium income
AccordingtotheKeynesianTheory,equilibriumconditionisgenerallystatedintermsof
aggregatedemand(AD)andaggregatesupply(AS).Aneconomyisinequilibriumwhen
aggregatedemandforgoodsandservicesisequaltoaggregatesupplyduringaperiodof
time.
Exports multiplier
The foreign trade multiplier also known as export multiplier operates like the
investment multiplier of Keynes. It may be defined as the amount by which
national income of a nation will be raised by a unit increase in domestic
investment on exports.

Full employment income

Full employment, in macroeconomics, is the level of employment rates where
there is no cyclical or deficient-demand unemployment. It is defined by the
majority of mainstream economists as being an acceptable level of
unemployment somewhere above 0%.
Government spending multiplier
DEFINITION of 'Fiscal Multiplier' The ratio in which the change in a nation's
income level is affected by government spending. The fiscal multiplier is used
to measure the effect of government spending (fiscal policy) on the subsequent
income level of that country
Imports Multiplier
it augments the slope of the aggregate expenditures line and is part to the
multiplier process. A related marginal measure is the marginal propensity to
consume. The marginal propensity to import (MPM) indicates the extent to which
imports are induced by changes in income or production.
Investment Multiplier
The term investment multiplier refers to the concept that any increase in public
or private investment spending has a more than proportionate positive impact
on aggregate income and the general economy.

Marginal propensity to save

The marginal propensity to save (MPS) is the fraction of an increase in income

that is not spent on an increase in consumption. That is, the marginal
propensity to save is the proportion of each additional dollar of household
income that is used for saving.
Productive Capacity
Productive capacity is the maximum possible output of an economy. According
to the United Nations Conference on Trade and Development (UNCTAD), no
agreed-upon definition of maximum output exists.

Savings
an economy of or reduction in money, time, or another resource.
Tax Multiplier
The tax multiplier is the negative marginal propensity to consume times one
minus the slope of the aggregate expenditures line. The simple tax multiplier
includes ONLY induced consumption
Aggregate Expenditures
Aggregate Expenditure is a measure of national income. Aggregate
Expenditure is defined as the current value of all the finished goods and
services in the economy. The aggregate expenditure is thus the sum total of all
the expenditures undertaken in the economy by the factors during a given time
period.nm
Aggregate Supply
Aggregate supply (AS) is defined as the total amount of goods and services
(real output) produced and supplied by an economy's firms over a period of
time.
Consumption Expenditures
A measure of price changes in consumer goods and services. Personal
consumption expenditures consist of the actual and imputed expenditures of
households; the measure includes data pertaining to durables, non-durables and
services.
Consumption multiplier
Export expenditures
Net Exports' The value of a country's total exports minus the value of its total
imports. It is used to calculate a country's aggregate expenditures, or GDP, in
an open economy.
Fiscal Policy
Fiscal policy is the means by which a government adjusts its spending levels
and tax rates to monitor and influence a nation's economy. It is the sister strategy
to monetary policy through which a central bank influences a nation's money
supply.
Government Expenditures
What a government spends in order to achieve its planned budget.
Import Expenditures
refers to the money spent on imported goods

Investment Expenditures
Marginal Propensity to consume
is a metric that quantifies induced consumption, the concept that the increase in
personal consumer spending (consumption) occurs with an increase in
disposable income (income after taxes and transfers)
Multiplier
a factor by which an increment of income exceeds the resulting increment of
savings or investment
1/1-MPC
Productive linkages
Savings function
Saving is that part of income which is not spent on current consumption. The
relationship between saving and income is called saving function.
Tax revenue
is the income that is gained by governments through taxation
PART 1
1.
The aggregate expenditure is the sum of all the expenditures
undertaken in the economy by the factors during a specific time
period. The equation is: AE = C + I + G + NX.
The aggregate expenditure determines the total amount that firms and
households plan to spend on goods and services at each level of
income.
The aggregate expenditure is one of the methods that is used to
calculate the total sum of all the economic activities in an economy,
also known as the gross domestic product (GDP).
When there is excess supply over the expenditure, there is a reduction
in either the prices or the quantity of the output which reduces the
total output (GDP) of the economy.
When there is an excess of expenditure over supply, there is excess
demand which leads to an increase in prices or output (higher GDP).

3
4

Written out the equation is: aggregate expenditure equals the sum of
the household consumption (C), investments (I), government spending
(G), and net exports (NX).
Consumption (C): The household consumption over a period of
time.
Investment (I): The amount of expenditure towards the capital

7
8

goods.
Government expenditure (G): The amount of spending by
federal, state, and local governments. Government expenditure can
include infrastructure or transfers which increase the total expenditure
in the economy.
Net exports (NX): Total exports minus the total imports.

2.
TheKeynesianConsumptionfunctionexpressesthelevelofconsumerspending
dependingonthreefactors.
Yd=disposableincome(incomeaftergovernmentinterventione.g.benefits,andtaxes)
a=autonomousconsumption(consumptionwhenincomeiszero.(e.g.evenwithno
income,youmayborrowtobeabletobuyfood))
b=marginalpropensitytoconsume(the%ofextraincomethatisspent).Alsoknownas
inducedconsumption.
Thissuggestsconsumptionisprimarilydeterminedbythelevelofdisposableincome
(Yd).HigherYd,leadstohigherconsumerspending.
Thismodelsuggeststhatasincomerises,consumerspendingwillrise.However,
spendingwillincreaseatalowerratethanincome.
It means 0 < MPC < 1. The reason is that incremental income can be either
consumed or entirely saved. If entire incremental income is consumed, the
change in consumption (C) will be equal to change in income (Y) making MPC
= 1. In case the entire income is saved, change in consumption is zero meaning
MPC = 0.
2b.

where: S is saving, Y is income (national or disposable), c is the

intercept, and d is the slope.
The two key parameters that characterize the saving function are slope
and intercept.
Slope: The slope of the saving function (d) measures the change in
saving resulting from a change in income. If income changes by $1,
then saving changes by $d. This slope is generally assumed and
empirically documented to be greater than zero, but less than one (0
< d < 1). It is conceptually identified as induced saving and the
marginal propensity to save (MPC).

10
Intercept: The intercept of the saving function (c) measures the
amount of saving undertaken if income is zero. If income is zero, then
saving is $c. The intercept is generally assumed and empirically
documented to be negative (c < 0). It is conceptually identified as
autonomous saving.

3.
4.
The equilibrium level of income is when an economy or business has
an equal amount of production and market demand.
An economy is said to be at its equilibrium level of income when
aggregate supply and aggregate demand are equal. In other words, it
is when GDP is equal to total expenditure.
the formula becomes Y = C + I + G, where Y is aggregate income, C is
consumption, I is investment expenditure, and G is government
expenditure.

11

5. This level of output is called the full employment level of

national income. At this level of income, everyone who wants a job
will have a job and there is no shortage of demand in the economy
A tax increase will decrease disposable income, because it takes money
out of households. A tax decrease will increase disposable income, because it
leaves households with more money. Disposable income is the main factor
driving consumer demand, which accounts for two-thirds of total demand.
6.
. full level employment:
If a government
sets a target unemployment level and this is reached, the economy is
said to be operating at full employment (Nf).
7b.
MPC represents the amount by which consumption spending changes
when disposable income changes.
We can also use the MPC to determine how much consumption will
change as income changes:
Change in consumption= change in disposable income x mpc
National income and disposable income differ by a constant amount,
so changes in the two numbers always give us the same value.

8.
yes I agree.
Whenthegovernmentcutspersonalincometaxes,forinstance,itincreaseshouseholds
takehomepay.Householdswillsavesomeofthisadditionalincome,buttheywillalso
spendsomeofitonconsumergoods.
Whenthegovernmentcutstaxesandstimulatesconsumerspending,earningsandprofits
rise,whichfurtherstimulatesconsumerspending.Thisisthemultipliereffect.
9.
a.