Ch 11 Spending, Output, and Fiscal Policy

Question 1

Menu costs

Answer 1

the costs of changing prices

Question 2

Planned aggregate expenditure (PAE)

Answer 2

total planned spending on final goods and services

Question 3

Consumption function

Answer 3

the relationship between consumption spending and its determinants, in particular, disposable income

Question 4

Autonomous consumption

Answer 4

consumption spending that is not related to the level of disposable income

Question 5

Wealth effect

Answer 5

the tendency of changes in asset prices to affect households’ wealth and thus their consumption spending

Question 6

Marginal propensity to consume (mpc)

Answer 6

the amount by which consumption rises when disposable income rises by $1; we assume that 0

Question 7

Autonomous expenditure

Answer 7

the portion of planned aggregate expenditure that is independent of output

Question 8

Induced expenditure

Answer 8

the portion of planned aggregate expenditure that depends on output Y

Question 9

Expenditure line

Answer 9

a line showing the relationship between planned aggregate expenditure and output

Question 10

Short-run equilibrium output

Answer 10

the level of output at which output Y equals planned aggregate expenditure PAE; the level of output that prevails during the period in which prices are predetermined

Question 11

Income-expenditure multiplier

Answer 11

the effect of a one-unit increase in autonomous expenditure on short=run equilibrium output

Question 12

Stabilization policies

Answer 12

government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps

Question 13

Expansionary policies

Answer 13

government policy actions intended to increase planned spending and output

Question 14

Contractionary policies

Answer 14

government policy actions designed to reduce planned spending and output

Question 15

Fiscal policy

Answer 15

decisions about how much the government spends and how much tax revenue it collects

Question 16

Automatic stabilizers

Answer 16

provisions in the law that imply AUTOMATIC increases in government spending or decreases in taxes when real output declines