Ch. 11- Aggregate Expenditure

Question 1

What are some effects of depressions and recessions

Answer 1

> Workers lose jobs
Machines are idle
Inventories accumulate
Output falls sharply

Question 2

Aggregate Expenditure (Y)

Answer 2

Divided into four primary components of spending: consumption (C), investment (I), government spending (G), and net exports (NX).

Y=C+I+G+NX

Question 3

What are the 4 factors that affect consumption?

Answer 3

> Current Income (Increases C)
Wealth (Increases C)
Expected Future Income (Increases C)
Interest Rate (Decreases C)

Question 4

What are the 3 factors that affect investment?

Answer 4

> Expected Profitability (Increases I)
Interest Rate (Decreases I)
Business Taxes (Decreases I)

Question 5

What determines the government spending component of aggregate expenditure?

Answer 5

Transfer payments are negatively correlated with aggregate income

Question 6

What are the 5 factors that affect net exports?

Answer 6

>Domestic Income (Decreases NX)
>Foreign Income (Increases NX)
>Real Exchange Rate (Decreases NX)
>Tastes for Foreign Goods (Decreases NX)
>Trade Policies (Can increase or decrease NX depending on the policy)

Question 7

Autonomous Expenditure

Answer 7

Expenditure that is not affected by current levels of income in the economy

Question 8

What did John Maynard Keynes believe caused the Great Depression?

Answer 8

Insufficient Spending

Question 9

Planned Investment

Answer 9

The amount firms actively decide to put into resources and inventory. Can differ from actual investment as changes in aggregate demand affect inventory accumulation (excess inventory)

Question 10

Actual Investment

Answer 10

The amount of new capital investment and actual inventory changes. Unexpected changes in aggregate demand can cause actual inventories to be higher or lower than expected.

Question 11

Unexpected Slackness in Demand

Answer 11

Difference between planned and actual inventories

Question 12

Planned Aggregate Expenditure (PAE)

Answer 12

The aggregate expenditure level that consists of consumption, planned investment, government spending, and net exports — into two parts:
>Part dependent on income
>Part dependent on all other factors (real interest rates, wealth, and taxes)

Question 13

When does Keynesian Equilibrium occur?

Answer 13

When PAE = Actual Aggregate Expenditure

Question 14

Recessionary Gap

Answer 14

Occurs when equilibrium aggregate expenditure is below the level needed for full employment

Question 15

Inflationary Gap

Answer 15

Occurs when equilibrium aggregate expenditure is above the level needed for full employment.

Question 16

Multiplier Effect

Answer 16

The increase in consumer spending when one person causes others to spend.

Question 17

Crowding out

Answer 17

Governments increasing demand for money to finance its spending causing the cost of borrowing (interest rate) to increase leading to firms investing less (decreases GDP).

Question 18

Expenditure Multiplier

Answer 18

Factor by which output increases in response to change in aggregate expenditure.

Represented by Equation 11-2