Ch. 21 The simplest Short-Run Macro Model

Question 1

What are the two components excluded in the simplest macro model?

Answer 1

No government (therefore no taxes), and no trade (therefore no exports/imports)

Question 2

What are the four components of Desired Aggregate Expenditure (actual)?

Answer 2

Same as the actual values of the various categories of expenditure in GDP calculations

• desired consumption
• desired investment
• desired government purchases
• desired net exports

Question 3

What is meant by “desired” expenditure?

Answer 3

“Desired” expenditure refers to what consumers and firm would like to purchase given their real-world constraints of income and market prices.

Could also be that the quantity of a certain good you “desire” is not available in an economy

Question 4

What the four factors that influence desired consumption?

Answer 4

1. current disposable income
2. wealth
3. interest rates
4. expectations about the future

Question 5

What kind of movement is caused by changes in current disposable income?

Answer 5

Movement ALONG the consumption and saving curves

Question 6

What kind of movement is caused by changes in wealth, interest rates and expectations?

Answer 6

Shifts in consumption and saving curves

Question 7

Define Autonomous expenditure

Answer 7

Elements of expenditure that do not change systematically with national incomes

Question 8

Define Induced expenditure

Answer 8

Any component of expenditure that is systematically related to nation income (consumption increase with increasing incomes).

Question 9

What is the formula to measure Desired Aggregate Expenditure?

Answer 9

AE = C + I + G + (X - IM)

Question 10

What is the formula to measure marginal propensity to consume?

Answer 10

MPC = changes in C/ changes in Yd

Where C is desired consumption and Yd is disposable income

Question 11

What is the formula to measure marginal propensity to save?

Answer 11

MPS = changes in S/ changes in Yd

Where C is desired savings and Yd is disposable income

Question 12

How do one calculate the slope of the consumption curve?

Answer 12

MPC

Question 13

How do one calculate the slope of the saving curve?

Answer 13

MSP

Question 14

What is the difference between marginal and average propensities to consume and save?

Answer 14

Marginal = changes in consumption/saving due to an additional dollar earned
Average = average consumption/saving per dollar owned

Question 15

Is desired investment an autonomous or induced expenditure? What components does “I” include?

Answer 15

Autonomous expenditure

“I” includes changes in inventory, residential construction, and new plants and equipment

Question 16

What happens to MPC and APC when income rises?

Answer 16

MCP is constant and is a measure between 0 and 1

ACP falls as income rises

Question 17

What causes the C function to shift upward?

Answer 17

An increase in wealth, an increase in optimism about the future, or a decrease in interest rates

Question 18

What causes the S function to shift downward?

Answer 18

An increase in wealth, an increase in optimism about the future, or a decrease in interest rates