Chapter 11 - Output and Expenditure in the Short Run

Question 1

Marginal Propensity to Consume (MPC)

Answer 1

Change in Consumption/ Change in Disposable Income

Question 2

MPC is the slope of what?

Answer 2

Consumption Function

Question 3

Consumption Function

Answer 3

the relationship between consumption spending and disposable income

Question 4

Disposable Income =

Answer 4

National Income - (Taxes - Transfers)

Question 5

Marginal Propensity to Save (MPS)

Answer 5

Change in Saving/ Change in Disposable Income

Question 6

National Income =

Answer 6

Consumption + Savings + Taxes

Question 7

Aggregate Expenditure Model

Answer 7

a macroeconomic model that focuses on teh relationship between total spending and real GDP, assuming the price level is constant

Question 8

Aggregate Expenditure

Answer 8

C+I+G+X-IM (same as GDP)

Question 9

Actual Investment =

Answer 9

Planned Investment - Unplanned Change in Inventory

Question 10

Multiplier =

Answer 10

1/(1-MPC)

Question 11

Multiplier

Answer 11

The ratio of the total change in GDP caused by an autonomous change in aggregate spending to the size of that autonomous change.

Question 12

MPC high, multiplier is…

Answer 12

High

Question 13

Permanent Income Hypothesis

Answer 13

Freidman argued that consumer spending ultimately depends on change in regular income.

Question 14

Life-Cycle Hypothesis

Answer 14

consumers plan their spending over a lifetime, not just a response to their current disposable income.

Question 15

Shifts in Aggregate Consumption Function

Answer 15

Changes in Expected Future Disposable Income. Shifts down, increase disposable income. Shifts up, decrease in future disposable income.

Changes in Aggregate Wealth.

Question 16

Planned Investment Spending

Answer 16

the investment spending that businesses intend to undertake during a given period.

Question 17

Three main principles of investment spending

Answer 17

Interest Rate

The expected future level of real GDP

Current Level of Production Capacity.

Question 18

Interest Rate does or does not affect retained earnings

Answer 18

does not affect retained earnings

Question 19

Accelerator Principle

Answer 19

a higher growth rate of real GDP leads to higher planned investment spending

Question 20

Income-Expenditure Equilibrium

Answer 20

When aggregate output , measured by GDP, is equal to planned aggregate spending.

Question 21

Income-Expenditure Equilibrium GDP

Answer 21

the level of real GDP at which real GDP equals planned aggregate spending.

Question 22

Paradox of Thrift

Answer 22

households and firms cut their spending in anticipation of future tough economic times. Good for family hurts economy in long run making everyone worse off.