Chapter 12 - Aggregate Demand in Keynesian Analysis

Question 1

Recessionary gap

Answer 1

Equilibrium at a level of output below potential GDP because AD falls

Question 2

Inflationary gap

Answer 2

Equilibrium at a level of output above potential GDP because AD rises

Question 3

3 factors that affect consumption

Answer 3

Disposable income, expected future income, wealth or credit

Question 4

Disposable income

Answer 4

Income after taxes

Question 5

Investment expenditure

Answer 5

Spending on new capital goods

Question 6

Four categories of investment

Answer 6

Producer’s durable equipment and software, new nonresidential structures, changes in inventories, and residential structures

Question 7

2 factors that affect investment

Answer 7

Expectations of future profits and interest rates

Question 8

Things that can be affecting through government spending

Answer 8

investment and consumption can be influenced, policies can be put in place to stimulate the economy in recession

Question 9

2 factors that cause a shift in exports and imports

Answer 9

Changes in relative growth rates between countries and changes in relative prices between countries

Question 10

2 building blocks of the Keynesian view of recession

Answer 10

AD is not always high enough to provide firms with an incentive to hire enough workers to reach full employment
The macroeconomy may adjust only slowly to shifts in aggregate demand because of sticky wages and prices

Question 11

Stick wages and prices

Answer 11

Do not respond to decreases or increases in demand

Question 12

Coordination argument

Answer 12

Downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other laborers and market participants

Question 13

Expenditure multipler equation

Answer 13

Change in real GDP / Change in spending > 1

Question 14

Expenditure multiplier definition

Answer 14

A change in autonomous spending causes a more than proportionate change in real GDP

Question 15

Macroeconomic externality

Answer 15

When what happens at the macro level is different from and inferior to what happens at the micro level

Question 16

Menu costs

Answer 16

Cost of changing prices

Question 17

Contractionary fiscal policy

Answer 17

Tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures

Question 18

Expansionary fiscal policy

Answer 18

Tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession

Question 19

Philips curve

Answer 19

Tradeoff between unemployment and inflation

Question 20

Keynesian view of the Philips curve

Answer 20

It should slope down so that higher unemployment means lower inflation, and vice versa

Question 21

Keynesian prescription for stabilizing the economy

Answer 21

Government intervention at the macroeconomic level (increasing aggregate demand when private demand falls and decreasing aggregate demand when private demand rises)