1. The Multiplier Effect The multiplier effect refers to the increase in final income arising from any new injection of spending. MPC (Marginal Propensity to Consume) is the increase in consumer spending when disposable income rises by $1 MPC= Consumer Spending/ Disposable Income – Means a change MPS (Marginal Propensity to Save) is the increase in household savings when disposable income rises by $1 Total increase in real GDP from $100 billion rise in I= [1/(1-MPC)]x$100 bill – For every $1 increase in investment spending, it raises both GDP and disposable income by $1, so if there was a $100 billion increase in spending, it would result in a $100 billion increase in GDP. – An example would be trickle-down economics – Essentially, what money is put in, is what it increases by.

2.  AAS: An initial rise or fall in aggregate spending that is the cause, not the result, of a series of income and spending changes.  Multiplier: The ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change.  The multiplier effect can have an infinite number of rounds because it is a multiplication of the initial investment by the consumer spending which always increases. The reason it hits a limited a point because of the marginal propensity to save (MPS), which is the humanistic need to save when spending. This causes the multiplier effect to hit a wall where you can no longer spend while you save.  Y= [1/(1-MPC)] x AAS This equation is used to find the total change in GDP using the autonomous change in aggregate spending and the Marginal Propensity to Consume (MPC). stands for delta, which means change in.  Multiplier= ( Y)/( AAS)= [1/(1-MPC)] The Multiplier

3. Consumption and Saving People with more disposable income have the ability to spend more. Therefore, the higher the current disposable income, the higher the consumer spending. Consumption Function: an equation showing how an individual household’s consumer spending varies with the household’s current disposable income Autonomous Consumer Spending: the amount of money a household would spend if it had no disposable income Aggregate Consumption Function: the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending

5. Natalie H. Emily C. Ahmed H. Paul M.

6. The Aggregate Consumption Function- shows the relationship between disposable income and consumer spending for the economy as a whole, other things equal. When things other than disposable income change, the aggregate consumption function shift. 1. Changes in Expected Future Disposable Income Expectations about future disposable income can affect consumer spending. So future income determines whether the graph shifts up or down. 2. Changes in Aggregate Wealth The key is that wealth has an effect on consumer spending, it is emphasized by an influential economic model of how consumers make choices about spending versus saving called the life-cycle hypothesis. This hypothesis shows consumers plan their spending over their lifetime, not just paycheck to paycheck. Even if two people have the same disposable income, how they spend on consumption depends on their wealth. Group 4 Babb Mullennix Saito Wilson

7. Investment Spending 1. Spending on productive physical capital, such as machinery and construction of structures, and on changes to inventories. Basic English Terms: Investment spending is the creation and acquisition of capital to stimulate economic production. 2. Planned Investment Spending: Is the investment spending that business intend to undertake during a given period. Basic English Terms: Investments made for a given amount of time. 3. Higher interest rates reduce investment spending. Investment spending is under-taken when the return expected from it exceeds the costs of borrowing. If the cost of borrowing is higher, then fewer investments can be expected to repay the borrowing cost, so fewer will be undertaken 4. A higher expected future growth rate of real GDP results in higher level of planned investment spending, but a lower expected future growth rate of real GDP leads to lower planned investment spending. Blair B., Cody Whitehead, Patrick McCarthy, Brendan Levine, Cesar Orozco, Katt Pittard

8. Inventories are stocks of goods held to satisfy future sales. Inventory spending is the value of change in total inventories held in the economy during a given period. Unplanned Inventory spending occurs when actual sales are less than businesses expected, leading to unplanned increases in inventory. Actual Investment spending is the sum of planned inventory spending and unplanned inventory spending. I = I unplanned + I planned The formula shows total investment in the economy See definitions above for factor explanations Apple produced 1 million new Iphones that were expected to sell. However, as people find issues with the product, they only sell 500,000 which leaves them with an unplanned inventory investment of 500,000 phones.