Ch 10 - Self-Adjustment or Instability?

Question 1

aggregate demand (AD)

Answer 1

the total quantity of output demanded at alternative price levels in a given time period, ceteris paribus

Question 2

full-employment GDP

Answer 2

the value of total output (real GDP) produced at full employment

Question 3

leakage

Answer 3

income not spent directly on domestic output but instead diverted from the circular flow, for example, savings, imports, taxes

Question 4

disposable income

Answer 4

after-tax income of consumers; personal income - personal taxes

Question 5

gross business saving

Answer 5

depreciation allowances and retained earnings

Question 6

injection

Answer 6

an addition of spending to the circular flow of income

Question 7

equilibrium GDP

Answer 7

the value of total output (real GDP) produced at macro equilibrium (AS = AD)

Question 8

marginal propensity to consume (MPC)

Answer 8

the fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income

Question 9

multiplier

Answer 9

the multiple by which an initial change in spending will alter total expenditure after an infinite number of spending cycles; 1 / (1 - MPC)

Question 10

recessionary GDP gap

Answer 10

the amount by which equilibrium GDP falls short of full-employment GDP

Question 11

cyclical unemployment

Answer 11

unemployment attributable to a lack of job vacancies, that is, to an inadequate level of aggregate demand

Question 12

full employment

Answer 12

the lowest rate of unemployment compatible with price stability; variously estimated at between 4% - 6% unemployment

Question 13

demand-pull inflation

Answer 13

an increase in the price level initiated by excessive aggregate demand

Question 14

inflationary GDP gap

Answer 14

the amount by which equilibrium GDP exceeds full-employment GDP