Chapter 11- Spending, Output, and Fiscal Policy

·      Menu costs- the costs of changing prices

·      Planned Aggregate Expenditure (PAE)- total planned spending on final goods and services

·      Consumption function- the relationship between consumption spending and its determinants, in particular, disposable income

where  is autonomous consumption, mpc is the marginal propensity to consume, and (Y-T) is disposable income

·      Autonomous consumption- consumption spending that is not related to the level of disposable income

·      Wealth effect- the tendency of changes in asset prices to affect households’ wealth and thus their consumption spending

·      Marginal propensity to consume (mpc)- the amount by which consumption rises when disposable incomes rises by $1; we assume that 0 < mpc < 1

·      Autonomous expenditure- the portion of planned aggregate expenditure that is independent of output

·      Induced expenditure- the portion of planned aggregate expenditure that depends on output Y

autonomous expenditure is 960

induced expenditure is 0.8Y

·      Expenditure line- a line showing the relationship between planned aggregate expenditure and output

·      Short run equilibrium output- the level of output at which output Y equals planned aggregate expenditure PAE; the level of output that prevails during the period in which prices are predetermined

·      Income expenditure multiplier- the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output

·      Stabilization policies- government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps

·      Expansionary policies- government policy actions intended to increase planned spending and output

·      Contractionary policies- government policy actions designed to reduce planned spending and output

·      Fiscal policy- decisions about how much the government spends and how much tax revenue it collects

·      Automatic stabilizers- provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines