Chapter 11 Aggregate Expenditure (Modeling)

Question 1

what are the 4 components of Aggregate expenditure?

Answer 1

Consumption
Investments
Government Spendings
Net Exports
Y = C + I + G + NX

Question 2

Factors that affect Consumption

Answer 2

Current income
Wealth
Expected future income
Interest rates

Question 3

Factors that affect Investments

Answer 3

Productive input = firm profit
Buying investments when interest rates are low

Question 4

Marginal Propensity to Consume (MPC)

Answer 4

Change in consumption/ Change in disposable income

Question 5

what is Fiscal policy?

Answer 5

when the government takes taxes from the people and turns it around into the economy as a way to stimulate or restrain the economy.

Question 6

factors that affect Net Exports

Answer 6

exports - imports

1. domestic income
2. foreign income
3. currency exchange rate
4. taste for foreign trade
5. having equal trade with other countries

Question 7

What is autonomous spending?

Answer 7

spending that we need to do even if our income is zero. food, shelter, clothes on our back

A

Question 8

Induced spending

Answer 8

induced spending happens when our income is more than we need to spend autonomously.

extra spending money

Marginal propensity to consume x national income

Question 9

what sets the Aggregate expenditure Equlibrium?

Answer 9

when planned aggregate expenditure is equal to actual aggregate expenditure.

when the GDP matches the spendings of firms, and inventories are not overflowing

Question 10

Planned aggregate expenditure

Answer 10

PAE is the amount of spending that firms, households and individuals are planning to make.

PAE = (a + bY) + I + G + NX

the difference between PAE and Y is unplanned inventory

Question 11

Keynesian theory

Answer 11

governments need to spend money to get the economy flowing and out of a recession. this causes inflation, but eventually the boom evens out.
the economy can go into a downward spiral below potential output if prices don’t adjust.

Question 12

What is an output gap?

Answer 12

Recessionary output gap: when Equilibrium aggregate expenditure is BELLOW the level needed for employment.

Inflationary output gap: when Equilibrium aggregate expenditure is ABOVE the level needed for full employment.

Y full employment - Y current = output gap

Question 13

what is Animal Spirit?

Answer 13

when people spend or invest or save like other people. Going with the flow of the economy.

Question 14

Actual & Planned investment

Answer 14

Actual: the amount of new investment and inventory changes.
inventory change includes investment

Y = C + I (actual) + G + NX

Planned: the amount of money firms actively choose to put into new capital resources and inventory.

PAE = C + I (planned) + G + NX

If firms invest too high or too low, it can result in overflowing or not enough G+S that people want.

Question 15

What is the multiplier effect?

Answer 15

it happens when there is a positive MPC
it is the increase in consumer spending when spending by one person causes other people to spend.

it affects Aggregate expenditure directly and will start a cycle that changes consumption.

Closing the recessionary gap using government spending.

Question 16

How do you find the Government spending multiplier?

Answer 16

1 / 1 - MPC = Government spending multiplier

Question 17

how to find the change in government spending

Answer 17

recessionary gap = multiplier x government spending

Question 18

What is the great multiplier debate?

Answer 18

the MCP depends on whether government spending is crowding or adding to private spending.
if people save the money governments give them, the multiplier can be less effective.