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Macro Econ > Chapter 6 - The Simplest Short Run Macro System > Flashcards

Chapter 6 - The Simplest Short Run Macro System Flashcards

1
Q

What is the equation for actual national income from the expenditure side?

A

GDP = Ca + Ia + Ga + (Xa - IMa)

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2
Q

What is the equation for desired aggregate expenditure?

A

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

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3
Q

National income accounts measure ____________ expenditures in four broad categories.
National income theory deals with _________ expenditure in the same four categories.

A

actual

desired

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4
Q

How is the consumption function written?

A

C = a + bY

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5
Q

What are the components in
C = a + bY

(a, bY, and b)

A

a: autonomous part of consumption
bY: induced part of consumption
b: slope
a: vertical intercept

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6
Q

In this chapter, investment is treated as an autonomous or induced expenditure?

A

Autonomous

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7
Q

In the simple model, the MPD is the same as the MPC because

A

Only consumption varies with aggregate income

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8
Q

If there were a sudden decrease in desired autonomous consumption​ expenditure, inventories would ______

Firms would _____ their production (output)

A

Accumulate

Reduce

(// shift downwards)

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9
Q

What are the APC and MPC equations?

A

APC = C / Yd

MPD = ΔC / ΔYd

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10
Q

What is desired expenditure?

A

What people desire to spend out of the resources they actually have, given their real-world constraints of income and market prices

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11
Q

What is the difference between autonomous and induced expenditures?

A

Autonomous do NOT depend on national income
Induced change in response to changes in national income

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12
Q

What are the 3 assumptions we make in the simple macro model?

A
  1. Closed economy (No trade)
  2. No government = no taxes
  3. Price level is constant
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13
Q

What is disposable income (2 equations)

A

Yd = Savings + Consumption
or
Yd = Income - Taxes

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14
Q

What is disposable income (definition)

A

Income available to households after paying taxes

(in the simple model, Yd = national income because there are no taxes)

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15
Q

What are the 4 determinants of desired consumption?

A

Disposable income
Wealth
Interest rates
Expectations about the future

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16
Q

Changes in disposable income leads to what type of change for the consumption function?

A

Movements along the line

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17
Q

True or false

Changes in wealth, interest rates, and expectations about the future shift the consumption function?

A

True

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18
Q

The consumption function shifts upwards if:
Wealth __________,
Interest rates __________,
or
Expectations about the future _________

A

increases
decreases
increases (optimism)

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19
Q

If wealth increases, interest rates decrease, or there’s optimism about the future, what happens to the saving function?

A

It shifts downwards

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20
Q

Why does a fall in interest rates leads to more consumption?

A

Because it reduces the cost of borrowing

21
Q

What are the 3 categories of investment?

A

Inventory
Residential construction
New plant and equipment (Capital goods)

22
Q

What are the 3 important determinants of desired investment expenditure

A
  1. The real interest rate
  2. Change in the level of sales
  3. Business confidence
23
Q

A high real interest rate reduces or increases desired investment?

A

It reduces it because it makes investment expenditure cost more

24
Q

The higher the average level of sales, the ______ the desired stock of inventories

A

larger

25
Q

Optimism about the future leads to _______ desired investment

A

more

26
Q

Does GDP affect desired investment? Why?

A

No because most investment takes time to complete and is long-lasting, thus current GDP is not really important

27
Q

What is the assumption regarding desired investment?

A

It’s autonomous with respect to national income
BUT
we are not assuming it is constant

28
Q

What does the aggregate expenditure shows?

A

The desired spending in the economy for any given level of actual national income

29
Q

If desired aggregate expenditure is greater than actual national income, what happens to inventory and the firms’ output

A

inventories are falling

the firms produce more

30
Q

When is national income at equilibrium?

A

When
AE = Actual national income

31
Q

What is the autonomous expenditure if:
C = 400 + 0.8Yd
I = 400

A

$800

32
Q

Why is disposable income equal to national income in this model?

A

Because there is no government and therefore no taxation

33
Q

What are the equations for the multiplier?

A

Multiplier =
ΔY / Δ autonomous expenditure
=
(1 / (1 - MPD) )

34
Q

The magnitude of the change in national income is measured by _____

A

The multiplier

35
Q

The larger the MPD, the ______ the multiplier

A

larger

36
Q

What happens to which function as consumers spend as stock market soars?

A

The consumption function shifts up

37
Q

What happens to which function as optimism about vaccine​ roll-out leads to surge in business​ investment

A

The investment function shifts up

38
Q

According to the Paradox of​ Thrift, attempts to change the level of saving will __________ ?

A

cause the aggregate saving line to shift up, lowering equilibrium national income

39
Q

As the MPD becomes larger, the AE curve becomes _______

A

steeper

40
Q

What is the self-fulfilling prophecy

A

Expectations about a healthy economy can actually produce a healthy economy

41
Q

What is the most important determinant of consumption?

A

Current disposable income

42
Q

When (desired) aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________?

A

Fall
Increase

43
Q

What happens when there is an unplanned decrease in inventories?

A

Actual investment is less than planned investment.

44
Q

At the break-even level of disposable income, desired consumption __________ disposable income and desired saving is __________

A

equals,

zero

45
Q

What is the average propensity to consume formula?

A

C / Yd

Consumption / Disposable income

46
Q

How can you find the MPC on a consumption function?

A

∆C / ∆Yd

47
Q

Why is APC + APS = 1?

A

Because all disposable income is either spent or saved

48
Q

If you are given a graph with the investment and the saving function, at what point will the equilibrium level of income be?

A

At the intersection of investment and savings

(I = S)

Macro Econ (14 decks)

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