5-1. Macroeconomics

Question 1

What is macroeconomics?

Answer 1

Study of economic activity and outcomes for an entire economy.

Question 2

What are the 2 elements in the microeconomic 2-sector free-market model?

Answer 2

Resources and payments.

Question 3

What are the 3 elements to add in macroeconomics model?

Answer 3

Government, financial sector, foreign sector (imports/exports).

Question 4

What are the flows from individuals to those added 3 elements and to individuals?

Answer 4

From individuals:
To government: taxes. From: transfer pmts (wages)
To financial sector: savings. From: Interest/dividends
To foreign sector: Imports (buys). From: Interest/dividends (pay).

Question 5

What are the flows from businesses to those added 3 elements and to individuals?

Answer 5

From businesses:
To government: taxes. From: spending/subsidies.
To financial sector: interest/dividends. From: Investments
To foreign sector: Imports (buys). From: Interest/dividends (pay).

Question 6

What are leakages? Examples?

Answer 6

Individuals’ income not spent on domestic consumption.

Taxes, savings, imports (pay).

Question 7

What are injections? Examples?

Answer 7

Additions to domestic production not from individuals’ expenditures.
Investment expenditures, government spending, exports.

Question 8

Aggregate demand: what does it measure? What does it equal to?

Answer 8

Total spending in economy.

Sum of all market demand curves.

Question 9

Aggregate demand: what is it include?

Answer 9

Consumption spending.
Investment.
Government spending.
Net exports (Net imports would be subtracted).

Question 10

Aggregate demand: what is consumption spending? Does it include new housing? How much does it account for the aggregate US spending? What is the primarily factor that determines it?

Answer 10

Spending by individuals on goods and services.
No, it’s investment.
70%.
Personal disposable income (PDI).

Question 11

Aggregate demand: measures of consumption: what is consumption functions? What are 2 cases of PDI and CS?

Answer 11

Measures the relationship between disposable income (PDI) and consumption spending (CS).

• CS>PDI = borrowing (debt) or spending savings.
• CS

Question 12

Aggregate demand: measures of consumption: what is Average Propensity to Consume (APC)? How is average propensity to save (APS) computed?

Answer 12

Measures the percent of disposable income (PDI) spent on consumption (CS).
Ex: if PDI=$1 and CS=$.85, then APC=85%.

APS=reciprocal of APC. Therefore, APS+APC=100%

Question 13

Aggregate demand: measures of consumption: What is Marginal Propensity to Consume (MPC)? What is marginal propensity to save (MPS)?

Answer 13

Measures the change in consumption spending as a percent of the change in disposable income.
Ex: If $1.00 additional disposable income is received and .90 is spent on consumable goods, MPC = 90%
Ex: Yr 1 spending $90 out of $100 PDI. Yr 2 spending $150 out of $200 PDI. (150-90)/(200-100)=.60

MPS = reciprocal of MPC - MPS+MPC=100%

Question 14

Aggregate demand: what is investment spending? examples? How much does it account for the aggregate US spending?

Answer 14

Spending on capital items.
Residential and non-residential construction, business property, plant, equipment, business inventory.
15%. Tend to fluctuate much more than consumption spending.

Question 15

Aggregate demand: what is the most significant influencing factor? Other factors?

Answer 15

Sig: Interest rates.
Demographics, consumer confidence, consumer income/wealth, level of capacity utilization, technological advances, vacancy rates, current/expected level of sales.

Question 16

Aggregate demand: what is government spending and what is excluded?

Answer 16

Purchase of goods and services by all levels of government.

Excludes: transfer pmts because they are not for goods or services.

Question 17

Aggregate demand: how does change in government spending impact various factors? what is a way to finance changes in government spending?

Answer 17

It typically impacts taxes, which impact personal disposable income, which change personal consumption.

Financed by government borrowing.

Question 18

Aggregate demand: what are 2 ways government directly affects aggregate demand?

Answer 18

By changes to government spending and government taxation.

Question 19

Aggregate demand: what is discretionary fiscal policy?

Answer 19

Use of government spending and taxation to impact aggregate demand.

Question 20

Aggregate demand: How can government impact aggregate demand?

Answer 20

To increase aggregate demand:
By increasing gov. spending, decreasing taxation, increasing transfer pmts.

To decrease aggregate demand:
By decreasing gov. spending, increasing taxation, decreasing transfer pmts.

Question 21

Aggregate demand: what is exports? Imports?

Answer 21

Ex: amount of foreign spending on US goods.
Im: amount of US spending on foreign goods.

Question 22

Aggregate demand: what is net exports? How does it impact aggregate demand?

Answer 22

Exports - imports.
If exports > imports = positive: increase aggregate demand.
If exports < imports = negative: decrease aggregate demand.

Question 23

Aggregate demand: has US been net export or import country?

Answer 23

Net import country.

Question 24

Aggregate demand: what factors influence imports/exports?

Answer 24

• Relative levels of income/wealth
• Relative currency exchange rates
• Relative price levels
• Relative inflationary rates
• Import/export restrictions and tariffs

Question 25

Aggregate demand: what shifts aggregate demand curve?

Answer 25

Factors other than price change.

Question 26

Aggregate demand: what are factors shift aggregate demand curve outward (increase)?

Answer 26

Reduction in personal or corporate tax.
Improved consumer confidence.
New technology resulting in increased investment.
Interest rate declines.
Government spending increase.
Export increase/import decrease.
Increases in wealth.

Question 27

Aggregate demand: what are factors shift aggregate demand curve inward?

Answer 27

Opposite of what shifts outward.

Question 28

Aggregate demand: what is multiplier effect? Example?

Answer 28

Ripple effect of a change in demand on total change in demand.
Ex: increased investment spending = more personal income = more consumption spending.

Question 29

Aggregate demand: how is multiplier effect measured?

Answer 29

Using marginal propensity to consume (MPC):

Multiplier = change in spending x [1 / (1-MPC)]

Question 30

Aggregate demand: example:
MPC=.80. Investment spending=+$10,000,000.
What would be the result on multiplier and what does it mean?

Answer 30

Multiplier = 10,000,000 x [1 / (1 - .80)] = $50,000,000

An increase in investment spending of $10,000,000 will cause an increase in demand of $50 million.

Question 31

Aggregate supply: definition?

Answer 31

Total output of goods and services produced in the economy at different price levels.

Question 32

Aggregate supply: What are 3 types of slope?

Answer 32

• Classic aggregate supply curve
• Keynesian aggregate supply curve
• Conventional aggregate supply curve

Question 33

Aggregate supply: classic aggregate supply curve: what is it look like on a graph? Characteristics? Example?

Answer 33

Completely vertical supply curve.
No change in output as price increase at full employment.
Maybe associated with the very short-term.
Ex: limited concert tickets

Question 34

Aggregate supply: Keynesian aggregate supply curve: what does it look like? What is the relationship with full employment?

Answer 34

Horizontal up to the output at full employment, then slopes upward.
Qty increases at the same price until full employment, then increased qty only with increased supply.

Question 35

Aggregate supply: Conventional aggregate supply curve: what does it look like? Relationship with full employment?

Answer 35

Continuous positive slope that is steeper for output after full employment.
At full employment, prices increase proportionately faster than output supplied.

Question 36

Aggregate supply: what factors cause shift in the curve?

Answer 36

Factors other than price change.
Shift outward:
*Resource increase.
*Cost of resource decrease.
*Technological advances occur.

Question 37

Aggregate equilibrium: where is it on a graph?

Answer 37

Where AS (aggregate supply: half U shape) and AD (aggregate demand: downward straight slope) meets.

Question 38

Aggregate equilibrium: what is Y-axis and X-axis?

Answer 38

Y: Price level.
X: Real output

Question 39

Aggregate equilibrium: what changes? How is the new equilibrium determined?

Answer 39

Change in aggregate demand and/or supply.
It depends on whether demand or supply is increased/decreased,
The extent of each increase and/or decrease,
Which theoretical supply curve is assumed.

Question 40

Aggregate equilibrium: conventional supply curve: what happened to the curve when only demand changes? Only supply change?

Answer 40

D: Equilibrium qty and price will change in the same direction as demand.
S: Equilibrium qty will change in the same direction, but price will change in an opposite direction.

Question 41

Aggregate equilibrium: Keynesian supply curve: what happened to the curve when only demand changes? Only supply change?

Answer 41

D: More or less output until output at full employment at which point, output and price level each increase.
S: No effect unless AD intersects supply where it is positively sloped.