Chapter 3

Question 1

Composition of GDP

Answer 1

Consumption (C)

Investment (I)

Government spending (G)

Exports (X): purchases of South African goods and services by foreigners

Imports (IM): purchases of foreign goods and services by South African consumers, firms and Government

Question 2

Demand for goods

Answer 2

Z = C + I + G + (X - IM)

(X - IM) = 0 in a closed economy

Question 3

Consumption

Answer 3

a function of disposable income
when disposable income increases, so does consumption (behavioural equation)

Question 4

Investment

Answer 4

endogenous variable (variables depend on other variables)
exogenous variable (variables not explained within the model but are instead taken as given)

Question 5

Government spending

Answer 5

G and T (taxes) describe fiscal policy
the choice of taxes and spending by the government
exogenous (don’t behave with the same regularity as consumers/firms)

Question 6

Types of equations

Answer 6

Identities
Behavioural equations
Equilibrium conditions

Question 7

Tools macroeconomists use

Answer 7

1. Algebra, to make sure that the logic is correct.
2. Graphs, to build the intuition.
3. Words, to explain the results.

Question 8

Autonomous spending

Answer 8

part of the demand for goods that does not depend on output

Question 9

Using words for equilibrium output

Answer 9

1. Production depends on demand, which depends on income
2. An increase in demand leads to an increase in production and income
3. The increase in output that is larger than the initial shift in demand
4. The multiplier depends on the propensity to consume, which can be estimated using econometrics
5. The adjustment of output over time is called the dynamics of adjustment

Question 10

How long does it take for output to adjust?

Answer 10

depends on how and when firms revise their production schedule.

Question 11

Why would consumers decrease consumption if their disposable income has not changed?

Answer 11

They start worrying about the future, they decide to save more even if their current income has not changed

Question 12

Private saving

Answer 12

saving by consumers, is equal to their disposable income minus their consumption

Question 13

Public saving

Answer 13

taxes (net of transfers) minus government spending

budget surplus: T > G
budget deficit: T < G

Question 14

Condition for equilibrium in the goods market

Answer 14

Production = Demand
Investment = Saving

Question 15

Propensity to save

Answer 15

how much of an additional unit of income people save
between 0 and 1