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16 Cards in this Set

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Consumption
(C). Good and services purchased by consumers.
Is by far the largest component of GDP.
Investment
(I). Is called fixed investment. The purchase of capital goods. The sum of nonresidential and residential.
Government spending
(G). The purchases of goods and services by the federal, state and local governments.
It does not include government transfers, nor interest payments on the government debt, nor pension.
Imports
(IM). The purchases of foreign goods and services.
Exports
(X). The purchases of domestic goods by foreigners.
Trade balance
The difference between exports and imports.
Net exports.
Trade deficit
When exports exceed imports.
Trade surplus
When imports exceed exports.
Inventory investment
The difference between goods produced and goods sold in a given year. Is typically small.
Total demand for goods
Z ≡ C + I + G + X - IM
Disposable income
The income that remains after consumers have received transfers from the government and paid their taxes.
Consumption function
C = c₀ + c₁Yd
C = c₀ + c₁Yd
Behavioural equation
(Marginal) propensity to consume
(c₁). The effect on consumption of an additional dollar of disposable income. Must be positive and less than 1. 
The higher the propensity to consume, the higher the multiplier.
(c₁). The effect on consumption of an additional dollar of disposable income. Must be positive and less than 1.
The higher the propensity to consume, the higher the multiplier.
Autonomous spending
The component of the demand for goods that does not depend on the level of output.
Any change in autonomous spending will change output by more than its direct effect on autonomous spending.
Equilibrium equation
In equilibrium, production is equal to demand.
Demand in turn depends on income, which is itself equal to production.
IS relation
Stands for Investment = savings.
What firms want to invest must be equal to what people and government want to save.
Stands for Investment = savings.
What firms want to invest must be equal to what people and government want to save.
The equilibrium condition for the goods market