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Macroeconomics > Chapter 11 > Flashcards

Chapter 11 Flashcards

1
Q

The Multiplier’s Overall Effect on the Economy compared to initial autonomous increase or decrease

A

The overall affect will be more then the initial increase because of a chan reaction effect

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2
Q

Simplifying Assumptions for Multiplier and why (4x2)

A
  1. Producer’s willing to supply additional output at fixed price. (Isolates demand affect when price changes).
  2. Interest Rate is given.(Ensures it and the investment levels are fixed).
  3. No Government spending or taxes (Ensures GDP=Disposable Income)
  4. Exports and Imports=0 (No trade)
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3
Q

The Multiplier Chain Reaction Cycle

A

increase in disposable income (profits and wages) leads to increase in consumer and investment spending which leads to increase in aggregate output which increases disposable income

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4
Q

Marginal Propensity to consume and equation

A

the change in consumer spending when disposable income rises or decreases. (change in consumer spending / change in disposable income).

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5
Q

marginal propensity to save and equation

A

increase in household savings when disposable income rises, 1-MPC

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6
Q

example of multiplier effect

A

spending rises by 100billion, that 100billion becomes income of another individual, then MPCx100 billion is the extra income of another and so on

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7
Q

Multiplier Formula (Total Increase in RGDP)

A

(1/1-MPC)x(initial change)

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8
Q

autonomous change in aggregate expenditure

A

Initial Change in the desired level of spending of firms/H.H/gov at given level of GDP

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9
Q

AE, Y

A

Aggregate expenditure, GDP

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10
Q

Change in Real GDP by the multiplier equation

A

(1/1-MPC)x(AE0(change in aggregate spendng)

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11
Q

is the change in real GDP / change in Aggregate expenditure = to the multiplier? Yes or no?

A

Yes

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12
Q

The multiplier defined

A

ratio of total change in real GDP caused by autonomous change in aggregate expenditure to the size of that autonomous change.

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13
Q

greater the mpc=

A

greater the multiplier as less income is leaked out from spending

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14
Q

Disposable Income definition and equation and the relationship trend with GDP

A

GDP+TR-T, Income left after taxes paid and government transfers are received. Trend is a direct relationship

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15
Q

Why is Disposable Income=RGDP

A

no transfers or taxes

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16
Q

Individual Consumption Function and equation

A

Individual household consumer spendings and how it varies with their disposable income c=a+(mpc)x(yd)

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17
Q

what does each letter stand for in the consumption function- c=a+(mpc)x(yd)

A 
c = HH consumer spendings
a = autonomous consumer spending, y intercept, what a family could spend even with "zero" income 
yd= HH disposable income
MPC= marginal propensity to consume
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18
Q

what is the consumption function of the entire economy and how is it similar to a consumers (2)

A
  • every letter is capitalized
  • C=A+MPCxYD
  • disposable income= RGDP
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19
Q

trends of the consumption function graphed (3)

A
  • slope is the MPC
  • direct relationship with consumer spending on Y-axis and disposable income on the x-axis
  • if disposable income rises by a change in yd then consumer spending rises by a change in c
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20
Q

what shifts the consumption function (3)

A
  • change in autonomous spending
  • change in expected future disposable income
  • change in aggregate wealth
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21
Q

change in autonomous spending shifts ex increase is_____ and decrease is ___

A
  • increase = shift up

- decrease = shift down

22
Q

change in expected future and current disposable income (2)

A
  • expected future income increase = current spending increase
  • current disposable income increases = spend more
23
Q

permanent income hypothesis

A

consumer spending depends on expected income over long term

24
Q

life cycle hypothesis

A

consumer plans spending over life time

  • spend during retirement
  • save during years working
25
Q

Planned Investment Spending and what it depends on (3)

A
  • investment spending that businesses intend to purchase during a given period

Depends on 1. Interest Rate 2. Expected Future Real GDP 3. Current level of production capacity (Inventories)

26
Q
  1. Planned Investment Spending and Interest Rate (2)
A
  • indirect relationship (planned investment spending is high when interest rates are low)
  • firms investment spending projects to go ahead if they expect a rate of return higher then the cost of funds required to borrow to finance project
27
Q

opportunity cost of interest rate and purchasing investments

A

instead of purchasing equipment, firm could lend funds and earn interest

28
Q

RGDP is a ____ of future sales because firms ____.

A

proxy, don’t know what will happen to their sales every year

29
Q

for a given level of current capacity the ___ the future expected RGDP the _____ investment spending

A

lower, decreased

higher, increased

30
Q

for a given level of expected future RGDP the _____ the current capacity, the ______ the invesment spending

A

higher, decreased (firms realize they over produce and want to produce less)
lower, increased (firms realize they under produce and want to produce more)

31
Q

Accelerator Principle with investment spending

A

small decrease or increase in investment will have a much larger impact on RGDP due to the multiplier effect

32
Q

Accelerator Principle Example. Explain how expectations can lead to inflation or recession

A
  • lower expected sales lower investment spending which accelerates recession
  • higher expected sales increase investment spending which accelerates expansion
33
Q

Inventories

A

stocks of goods to satisfy future sales

34
Q

Actual investment spending

A

Iplanned + Iunplanned

35
Q

Inventory Investment

A

value of change in total inventories held in economy during given period.

36
Q

unplannned inventories

A

over/under estimate of investment spending, actual sales >or< expected sales

37
Q

increase in inventories

decreasing in inventories are signs of what and are they positive or negative

A
  • positive and economy is contracting (demand form buyers decrease therefore withdraw decreases)
  • negative and economy is expanding
38
Q

AEplanned and equation (3)

A

Planned aggregate spending of economy
AE planned= C + Iplanned
AE planned= A+MPCxYD + Iplanned

39
Q

Relate AEplanned and GDP and Disposable income at Eqbm

A

At the equilibrium AEplanned=RealGDP=Disposable Income and Iunplanned is zero

40
Q

AE planned and consumption function relate-ability

A

the planned Aggregate expenditure is basically the combination of all consumer consumption functions in the economy plus a upwards shift of planned investment.

41
Q

Trends of AEplanned graphed

A
  • direct relationship, as GDP increases so does AEplanned consumer spending
  • higher level of GDP=higher disposable income=higher spendings (AEplanned depends on RGDP)
  • slope of AE is the MPC
42
Q

If firms produce too much Iunplanned

if firms produce too little Iunplanned

A

will be positive as inventories are piling up and firm will need to produce less

will be negative as inventories are declining and firms will need to produce more

43
Q

Income Expenditure Equilibrium Equation

A

GDP=AEplanned + Iunplanned (Iunplanned is zero at eqbm)

44
Q

Whenever Real GDP exceeds AEplanned,

A

Iunplanned is positive

45
Q

Whenever Real GDP is less than AEplanned

A

Iunplanned is negative

46
Q

What is income expenditure equilibrium and what can RGDP be replaced wth

A

It is when AEplanned output = aggregate planned spending, since this is true we replace GDP with Y*

47
Q

describe what happens if economy is currently producing at a point where RGDP less then AE

A

Currently there is more planned spending then aggregate output (Y) firms realize that they a producing too little as unplanned inventories are negative, so next year they plan to produce more moving the point along the curve to Y*

48
Q

name 2 shifts that cause the aggregate expenditure to shift

A
  • change in planned investment due to the interest rate

- shift of the aggregate consumption function ex change in autonomous spending

49
Q

Describe what happens if the AE planned shifts up from the equilibrium point where AE=Y*

A

The graph shifted up because there was an increase in autonomous spending which now causes more spending then output at the original eqbm. Iunplanned is negative so next year the planned output level of firms must increase so they produce more and move to a new point along the AE line.

50
Q

Paradox of Thrift

A

What looks like good at first is really bad in the end due to the multiplier. Ex during recession people save shift then decrease spending which shifts the consumption function and the AE function worsening recession

51
Q

effects of international trade on GDP Multiplier

A
  • exports are like increase in consumer spending

- multiplier is weaker with trade as imports are leakage from the economy, imports don’t add to GDP

52
Q 
economic interdependance (3)
think about trade linkage with countries, what happens if one countries exports decline what would happen to another's imports
A
  • lower exports affects trade partners
  • countries have recessions and recoveries at same time
  • countries exports are another’s imports this cause countries to fall together ex the pandemic

Macroeconomics (10 decks)

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