Chapter 12

Question 1

aggregated expenditure model

Answer 1

focuses on the start run relationship between total spending + real GDP, assuming a constant price level

Question 2

aggregate expenditure (AE)

Answer 2

the sum of consumption, planned investment, government purchases, adn net exports, total spending in the economy

Question 3

four components in this model are the same as

Answer 3

GDP

Question 4

AE equation

Answer 4

AE = C + T + G + NX

Question 5

AE model uses

Answer 5

planned investments rather than actual investment

Question 6

the difference is that planned investment spending does not include the build up of

Answer 6

inventories

Question 7

inventories

Answer 7

goods that have been produced but not yet sold

Question 8

planned investment =

Answer 8

actual investment - unplanned changes in investment

Question 9

unplanned change inventories =

Answer 9

actual investment - planned investment

Question 10

equilibrium in the economy?

Answer 10

spending on output = value of output produced
AE = GDP

Question 11

if aggregate expenditure is equal to GDP

Answer 11

then inventories remain unchanged and the economy is in macroeconomic equilibrium

Question 12

if aggregate expenditure is less than GDP

Answer 12

then inventories rise, and GDP and employment decreas

Question 13

if aggregate expenditure is greater than GDP

Answer 13

then inventories fall, and GDP and employment increase

Question 14

if we are not at equilibrium the economy will

Answer 14

move towards equilibrium

Question 15

with moving towards equilibrium GDP + employment

Answer 15

change as a result

Question 16

if net exports were negative

Answer 16

imports > exports

Question 17

what affects the level of consumption

Answer 17

current disposable income, household wealth, expected future income, the price level, interest rate

Question 18

disposable income

Answer 18

YD= personal income - personal income taxes + transfer payments

Question 19

wealth does not equal

Answer 19

income

Question 20

household wealth is

Answer 20

assets (homes, stocks, bonds) and liabilities (mortgage, student loans)

Question 21

most people prefer to keep their consumption fairly stable from year to year, a process known as

Answer 21

consumption smoothing

Question 22

how strong is the relationship between income and consumption?

Answer 22

Very strong, described best through consumption function as households spend a consistent fraction of each extra dollar of YD and C

Question 23

Marginal Propensity to consume (MPC)

Answer 23

the amount by which consumption spending changes when disposable income changes
-is the slope of the consumption function

Question 24

MPC=

Answer 24

change in consumption / change in disposable income

Question 25

disposable income is

Answer 25

income - taxes

Question 26

disposable income =

Answer 26

national income - net taxes

Question 27

we assume that national income and GDP are

Answer 27

equal

Question 28

national income =

Answer 28

disposable income + net taxes

Question 29

this equation just shows that if we assume that net taxes do not change as national income changes, we have the result that

Answer 29

any change in YD will be the same as change in national income

Question 30

national income =

Answer 30

consumption + savings + taxes Y =

Question 31

net taxes does not change

Answer 31

change in Y = change in consumption and change in savings

Question 32

marginal propensity to save

Answer 32

1 = MPC + MPS

Question 33

intuition:

Answer 33

you get an extra dollar you spend part of it (MPC) you save part of it (MPS)

Question 34

what affects the level of investment?

Answer 34

expectations of future profitability, interest rate, taxes, cash flow

Question 35

firms will build more if

Answer 35

optimistic about future profitability

Question 36

there is an ___ relationship between interest rate and investment spending

Answer 36

inverse

Question 37

what 2 ways does higher corporate income taxes on profits reduce investment

Answer 37

1. decrease money available for reinvestment 2. diminishing expected profitability of investment

Question 38

cash flow

Answer 38

the difference between the cash revenues received by a firm and the cash spending by the firm

Question 39

what is the largest contributor to cash flow

Answer 39

profit

Question 40

in recessions, profits fall for most, decreasing ability to

Answer 40

financial investments

Question 41

transfer payments are not included in

Answer 41

government purchases

Question 42

the value of net exports is affected by

Answer 42

price level in US vs the price level in other countries, us growth rate vs growth rate in other countries, us dollar exchange rate

Question 43

NX has been negative the last few decades which means

Answer 43

we import more than we export

Question 44

if us price level rises faster than foreign price levels, net exports will ____ , why?

Answer 44

decrease us goods become more expensive relative to foreign goods. our imports rise and exports fall

Question 45

if us price level rises slower than foreign price levels, net exports will ____ , why?

Answer 45

increase us goods become cheaper relative to foreign goods. our imports fall and exports rise

Question 46

us GDP grows faster than foreign GDP, net exports will __ , why?

Answer 46

decrease we're growing faster so US demand for imports rises faster than foreign demand for our exports

Question 47

us GDP grows slower than foreign GDP, net exports will __ , why?

Answer 47

increase we're growing slower so US demand for imports rises slower than foreign demand for our exports

Question 48

us dollar rises in value relative to other currencies, net exports will ___ , why?

Answer 48

decrease one dollar buys more now! imports are cheaper. but it is more expensive for other currencies to buy our dollars, so our exports are more expensive so imports rise and exports fall

Question 49

us dollar falls in value relative to other currencies, net exports will ___ , why?

Answer 49

increase one dollar buys less now! imports are more expensive. but it is cheaper for other currencies to buy our dollars, so our exports are more cheaper so imports fall and exports rise