Chapter 12

Question 1

aggregate expenditure model

Answer 1

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

Question 2

inventories

Answer 2

goods that have been produced but not sold yet

Question 3

TABLE 12.1

Answer 3

TABLE 12.1

Question 4

consumption function

Answer 4

the relationship between consumption spending and disposable income

Question 5

marginal propensity to consume (MPC)

Answer 5

the slope of the consumption function: the amount by which consumption spending changed when disposable income changes

Question 6

marginal propensity to save (MPS)

Answer 6

the amount by which saving changes when disposable income changes

Question 7

cash flow

Answer 7

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

Question 8

autonomous expenditure

Answer 8

an expenditure that does not depend on the level of GDP

Question 9

multiplier

Answer 9

the increase in equilibrium real GDP divided by the increase in autonomous expenditure

Question 10

multiplier effect

Answer 10

the process by which an increase in autonomous expenditure leads to a larger increase in real GDP

Question 11

aggregate demand curve (AD)

Answer 11

a curve that shows the relationship between the price level and the level of planned aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure