the total quantity of goods and services produced (or supplied) in an economy in a given period of time.
the total income received by all factors of production in a given period.
aggregate output (income) (Y)
a combined term used to remind you of the exact equality between aggregate output and aggregate income.
the relationship between consumption and income.
slope of the consumption function
change in C/
change in Y
straight line consumption curve
marginal propensity to consume (MPC)
the fraction of change in income that is consumed or spent.
aggregate saving (S)
the part of the economy that is not consumed
something that is always true by definition
marginal propensity to save (MPS)
the fraction of a change in income that is saved.
in an economy where you can only save or spend
MPC + MPS = 1
planned investment (I)
those additions to capital stock and inventory that are planned by firms.
the actual amount of investment that takes place; it includes items such as unplanned changes in inventory.
when planned aggregate expenditure is equal to aggregate output.
planned aggregate expenditure (AE)
the total amount the economy plans to spend in a given period.
saving/ investment approach to equilibrium
If Y= C+ I
then Y can be substituted for C + S and the equilibrium equation will be
C + S= C + I meaning that
the ratio of change in the equilibrium level of output to a change in some exogenous variable.
multiplier= 1 /(MPS)
or because MPS + MPC = 1