Chapter 11

Question 1

In the Keynesian what can we say about the prices of inventories and the quantity of inventories sold?

Answer 1

Prices are fixed
Quantity sold depends on demand

Question 2

Because each firm’s prices are fixed, what can we say about the economy as a whole?

Answer 2

The price level is fixed
Aggregate demand determines RGDP

Question 3

What is aggregate planned expenditure?

Answer 3

The sum of planned:
1. Consumption expenditure
2. Investment expenditure
3. Government expenditure
4. Exports
minus planned:
1. Imports

Question 4

What 2 components of planned expenditure change when RGDP changes?

Answer 4

1. Consumption expenditure
2. Imports

Question 5

Disposable Income Formula

Answer 5

YD = Y - T
Disposable Income = Aggregate Income - Net Taxes

Question 6

Disposable Income Allocation Formula

Answer 6

YD = C + S
Disposable Income = Consumption + Savings

Question 7

Marginal Propensity to Consume Formula

Answer 7

MPC = ΔC/ΔYD

Question 8

Marginal Propensity to Save Formula

Answer 8

MPS = ΔS/ΔYD

Question 9

MPC + MPS = ?

Answer 9

1

Question 10

What is the consumption function?

Answer 10

The relationship between consumption expenditure and disposable income

Question 11

Marginal Propensity to Import Formula

Answer 11

MPI = ΔI/ΔRGDP

Question 12

What is induced expenditure?

Answer 12

Consumption Expenditure - Imports

Question 13

What is autonomous expenditure?

Answer 13

Investment + Government + Exports

Question 14

Dissaving happens on the consumption function when?

Answer 14

The consumption function is over 45° line

Question 15

Saving happens on the consumption function when?

Answer 15

The consumption function is under 45° line

Question 16

Why can aggregate planned expenditure differ from actual aggregate expenditure?

Answer 16

because firms can have unplanned
changes in inventories

Question 17

What is equilibrium expenditure?

Answer 17

the level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP

Question 18

Describe inventories when:
aggregate planned expenditure exceeds real GDP (the AE curve is above the 45° line)

Answer 18

Firms have an unplanned decrease in inventories

Question 19

What happens when firms have an unplanned decrease in inventories?

Answer 19

Firms hire workers and increase production
Real GDP increases

Question 20

Describe inventories when:
aggregate planned expenditure is less than real GDP (the AE curve is below the 45° line)

Answer 20

Firms have an unplanned increase in inventories

Question 21

What happens when firms have an unplanned increase in inventories?

Answer 21

Firms fire workers and decrease production
Real GDP decreases

Question 22

What is the multiplier?

Answer 22

the amount by which a change in autonomous expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP

Question 23

Why does an increase in autonomous expenditure have a multiplier?

Answer 23

Autonomous expenditure ↑ - Real GDP ↑ - Induced expenditure ↑ - Aggregate expenditure ↑ - Real GDP ↑ …

Question 24

What is the size of the multiplier?

Answer 24

1/(1- Slope of AE Curve)

Question 25

How does a change in autonomous expenditure shift the AE curve?

Answer 25

AE curve shifts up

Question 26

How does a decrease in the price level change the AE curve?

Answer 26

Price ↓ - AE ↑