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ECON 104 > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

aggregated expenditure model

A

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

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2
Q

aggregate expenditure (AE)

A

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

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3
Q

four components in this model are the same as

A

GDP

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4
Q

AE equation

A

AE = C + T + G + NX

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5
Q

AE model uses

A

planned investments rather than actual investment

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6
Q

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

A

inventories

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7
Q

inventories

A

goods that have been produced but not yet sold

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8
Q

planned investment =

A

actual investment - unplanned changes in investment

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9
Q

unplanned change inventories =

A

actual investment - planned investment

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10
Q

equilibrium in the economy?

A

spending on output = value of output produced
AE = GDP

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11
Q

if aggregate expenditure is equal to GDP

A

then inventories remain unchanged and the economy is in macroeconomic equilibrium

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12
Q

if aggregate expenditure is less than GDP

A

then inventories rise, and GDP and employment decreas

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13
Q

if aggregate expenditure is greater than GDP

A

then inventories fall, and GDP and employment increase

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14
Q

if we are not at equilibrium the economy will

A

move towards equilibrium

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15
Q

with moving towards equilibrium GDP + employment

A

change as a result

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16
Q

if net exports were negative

A

imports > exports

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17
Q

what affects the level of consumption

A

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

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18
Q

disposable income

A

YD= personal income - personal income taxes + transfer payments

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19
Q

wealth does not equal

A

income

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20
Q

household wealth is

A

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

21
Q

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

A

consumption smoothing

22
Q

how strong is the relationship between income and consumption?

A

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

23
Q

Marginal Propensity to consume (MPC)

A

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

24
Q

MPC=

A

change in consumption / change in disposable income

25
Q

disposable income is

A

income - taxes

26
Q

disposable income =

A

national income - net taxes

27
Q

we assume that national income and GDP are

A

equal

28
Q

national income =

A

disposable income + net taxes

29
Q

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

A

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

30
Q

national income =

A

consumption + savings + taxes
Y =

31
Q

net taxes does not change

A

change in Y = change in consumption and change in savings

32
Q

marginal propensity to save

A

1 = MPC + MPS

33
Q

intuition:

A

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

34
Q

what affects the level of investment?

A

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

35
Q

firms will build more if

A

optimistic about future profitability

36
Q

there is an ___ relationship between interest rate and investment spending

A

inverse

37
Q

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

A
  1. decrease money available for reinvestment
  2. diminishing expected profitability of investment
38
Q

cash flow

A

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

39
Q

what is the largest contributor to cash flow

A

profit

40
Q

in recessions, profits fall for most, decreasing ability to

A

financial investments

41
Q

transfer payments are not included in

A

government purchases

42
Q

the value of net exports is affected by

A

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

43
Q

NX has been negative the last few decades which means

A

we import more than we export

44
Q

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

A

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

45
Q

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

A

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

46
Q

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

A

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

47
Q

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

A

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

48
Q

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

A

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

49
Q

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

A

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

ECON 104 (12 decks)

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