Aggregate Expenditure

Question 1

AE =

Answer 1

C + I + G + (X-M)

Question 2

what percent of GDP did each account for in 2020

Answer 2

consumption = 55%
investment = 17.9%
Gov Exp = 25.5%
Net exports = 2.3%

Question 3

what are the 3 categories of consumption

Answer 3

1. non durable goods (35%) - consumed up to 3 years after bought
2. durables (15%) - last more than 3 years
3. services (55%_

Question 4

Gov Exp: what is g1 and G2

Answer 4

G1: current spending (gov wages)
G2: capital spending (public)

Question 5

what are 4 factors affecting consumption spending

Answer 5

1. level of disposable incmoe
2. interest rates
3. gov econ policy (fsical)
4. changes in ER

Question 6

what are 3 factors affecting investment spending

Answer 6

1. risk: actual vs expected income
2. interest rates
3. profitability

Question 7

what are 3 factors influencing net exports

Answer 7

1. overseas/domestic econ activity
2. ER
3. movements in ToT

Question 8

Explain what (C=bY + a) means

Answer 8

rate consumption changes when income rises + level of consumption if consumer has no income

Question 9

draw the consumption function graph Y = C+S

Answer 9

refrence notes

Question 10

what is the marginal propensity to consume formula

Answer 10

MPC = change in C/change in Y

–> consumption function gradient

Question 11

MPS formula

Answer 11

change in S/Change in Y

Question 12

what is absolute propensity to consume or save (APC or APS)

Answer 12

proportion of total income spent on consumption or saved

as incomes rises APC falls APS rises

Question 13

on full AE diagram what does

1. equilibrium represent
2. above 45 line
3. below 45 line

Answer 13

1. eql: where AE = GDP (45 deg), everything is sold
2. above 45: AE > GDP and savings < spending so firms hire more resources
3. below 45: AE < output and savings > spending so firms cut production

Question 14

what is the multiplier and what is the formula

Answer 14

proportion by which income will rise following an initial change in spending (autonomous changes in C, I, G, X)

k= 1/(1-MPC) or 1/MPS
k= change in Y/CHange in I

Question 15

how is the multiplier related to MPC

Answer 15

determines the multipliers final impact. an increase in MPC, increase respending effect from a given investment whcih increases the multiplier
MPC changes based on attitudes to spending/savings

Question 16

what does 1>MPC> 0 mean for multiplier size

Answer 16

multiplier>1

Question 17

what happens when MPC = 1

Answer 17

multiplier = infinity

Question 18

how do leakages efffect the multiplier and what are they

Answer 18

reduce muliplier - savings, tax, imports

Question 19

what is ave multiplier

Answer 19

1.5 to 2.5

Question 20

what happens to AE during contraction DRAW GRAPH

Answer 20

AE falls so output and income fall from Y1 to Y2

Question 21

what happens to AE during expansion DRAW GRAPH

Answer 21

AE increases so ouptu and income rise Y3 to Y4