Chapter 21 Flashcards
What is desired aggregate income?
The sum of desired or planned spending on domestic output by households, firms, governments, and foreigners
What is autonomous expenditure?
Elements of expenditure that do not change systematically with national income
What is induced expenditure?
Any component of expenditure that is systematically related to national income
What is a closed economy?
An economy that has no foreign trade in goods, services or assets
What is the consumption function?
The relationship between desired consumption expenditure and all the variables that determine it, in the simplest case, the relationship between desired consumption expenditure and disposable income
What is average propensity to consume (APC)
Desired consumption divided by the level of disposable income
What is marginal propensity to consume (MPC)
The change in desired consumption divided by the change in disposable income that brought it about
What is average propensity to save (APS)
Desired saving divided by disposable income
What is marginal propensity to save (MPS)
The change in desired saving divided by the change in disposable income that brought it about
What is aggregate expenditure (AE) function
The function that relates desired aggregate expenditure to actual national income
What is marginal propensity to spend
The change in desired aggregate expenditure on domestic output divided by the change in national income that brought it about
What is a simple multiplier?
The ratio of the change in equilibrium national income to the change in autonomous expenditure that brought it about, calculated for a constant price level
What is the aggregate expenditure equation?
AE = C + I + G + (X - IM)
The constant term in the consumption function is:
autonomous expenditure
The part of consumption that responds to income is called:
induced expenditure
A change in _ income responds to a change in _ consumption and _ saving
disposable, desired, desired
The responsiveness of the changes of disposable income, desired consumption and saving are measured by:
MPC and MPS - both positive and sum to 1, indicating disposable income is consumed or saved
What leads to a change in autonomous consumption, and what happens as a result?
Changes in wealth, interest rates, expectations about the future
The consumption function shifts
Firms’ desired investment depends on:
real interest rates, changes in sales, and business confidence
In our model of the economy, investment is treated as _
autonomous
What is equilibrium national income?
The level of national income at which desired aggregate expenditure equals actual national income
What happens when income is less than national income?
Income is above equilibrium, inventories accumulate, and firms reduce output
What happens when income is below equilibrium?
Desired expenditure exceeds national income, inventories are depleted, and firms output increases
At what point does desired aggregate expenditure equal actual national income?
The point at which the aggregate expenditure curve cuts the 45degree line
Equilibrium national income is increased/reduced by a rise/fall in:
either autonomous consumption or autonomous investment expenditure
The magnitude of the effect on national income of shifts in autonomous expenditure is given by:
the multiplier. delta Y/ delta A where delta A is the change in autonomous expenditure
The simple multiplier is when:
the price level is constant. delta Y/delta A = 1/(1-z), where z is the marginal propensity to spend out of national income - the larger z is, the larger the multiplier
What + what adds up to aggregate expenditure?
Desired consumption and investment
If MPC _ the slope will increase. If MPC _ the slope will decrease
increases, decreases
An _ in tax rates should shift the C + I + G line _ since consumers have _ money to spend.
decrease, higher, more
A decrease in government spending will shift the C + I + G line _
down
An increase in _ will cause savings to increase.
interest rates
Actual investment will equal planned investment only when:
there is no unplanned change in inventory
Autonomous expenditure _ depend on the level of GDP
does not
Because:
It is the level of spending that will occur regardless of the level of GDP.
If the equation of a consumption function is C = 95 + 0.75YD, then 0.75YD represents:
induced consumption
When aggregate expenditures are less than the GDP inventories will:
rise
because:
The GDP measures production and the AE measures total spending. Therefore, when total spending is less than production you will see inventories build up.
The value of the multiplier is larger when the value of the:
MPC is larger
because:
A larger MPC means consumers are spending more of each dollar of disposable income which results in a larger multiplier.
If the marginal propensity to save (MPS) is 0.2, how much additional consumption will result from an increase of $100 billion in disposable income?
another $80 billion in additional consumption will result from an increase of $100 billion in disposable income.
The most important determinant of consumption is:
current disposable income
Macroeconomic equilibrium occurs where:
aggregate expenditure equals total production or GDP
The amount by which consumption spending increases when disposable income increases is called:
the marginal propensity to consume
If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion in disposable income?
$90 billion
When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.
fall; increase
If the MPC is 0.8, then a $100 million increase in desired investment will increase equilibrium GDP by:
$500 million
The multiplier is 1 / (1 – MPC), so in this case it is 1 / (1 – 0.8) = 5. So a $100 million x 5 = $500 million increase in GDP.
Disposable personal income is equal to personal income minus:
personal tax payments
Actual investment will equal planned investment only when:
there is no unplanned change in inventory
When aggregate expenditure is smaller than GDP, inventories will __________ and GDP and total employment will __________.
rise; decrease
If the real interest rate increases, then firms will invest in:
less inventories and less equipment
The real interest rate reflects the opportunity cost associated with investment, whether in inventories, residential construction, or new plant and equipment. The higher the real interest rate, the higher the opportunity cost of investment and thus the lower the amount of desired investment.
The smaller the marginal propensity to spend, the __________ the AE function and thus the __________ the simple multiplier.
flatter; smaller
The size of the simple multiplier depends on the slope of the AE function—that is, on the marginal propensity to spend, z.
Suppose households experience a decrease in wealth. This will result in a:
parallel shift of the AE curve downward
A decrease in household wealth will cause a fall in the amount of desired aggregate expenditure at each level of national income.
What happens when there is an unplanned decrease in inventories?
Actual investment is less than planned investment.
When aggregate expenditure is less than the GDP, businesses will increase inventory levels. When AE is greater than the GDP, businesses will sell out of inventory to make up the shortfall.
is the best description of the business cycle?
the short-run fluctuations of national income around its trend value
Consider a simple macro model with a constant price level and demand-determined output. When national income falls short of desired aggregate expenditures, unplanned inventory ________ will induce firms to ________ the rate of output production.
steeper the slope of the AE function.
Consider an economy with the following consumption function: C = 340 + 0.60YD, and investment function, I = 600.
When YD = 2200, what is autonomous expenditure?
940 (340 + 600)
Consider the consumption function in a simple macro model with no taxes. At the level of national income where APC = 1, the nation’s households are
Consuming all of their disposable income.
Consider a simple macro model with demand-determined output. In such a model, the multiplier is larger, the
steeper is the AE function.
When would we expect to see undesired or unplanned inventory accumulation?
when actual aggregate expenditure exceeds desired aggregate expenditure
When would we expect to see undesired or unplanned inventory decumulation?
when desired aggregate expenditure exceeds actual aggregate expenditure.
What is the difference between net investment and gross investment?
gross investment is equal to net investment plus depreciation. So if the question tells you net investment, then you add depreciation. If a question gives you gross investment, then you don’t add depreciation.
The “value added” for an individual firm is calculated as
the cost of employee wages and salaries plus firm profits.
In national-income accounting, when calculating GDP from the expenditure side, which of the following would count as part of government spending?
a) government pension payments.
b) wages paid to a teacher in a public school.
c) imports of computers by a private firm.
d) loans to university students.
e) household purchases of government bonds.
b) wages paid to a teacher in a public school.
You have the following data for a region in Canada:
Population aged 15+: 880000
Employed: 545000
Unemployed:34000
What is the unemployment rate in the region?
34000 + 545000
(34000)/(579000)
.0587 x 100
= 5.9%
