Chapter 8: Aggregate Demand and the Powerful Consumer

Question 1

Consumer expenditure (C)

Answer 1

Total amount spent by consumers on newly produced goods and services

Question 2

Aggregate demand

Answer 2

total amount that all consumers, business firms, government agencies, and foreigners spend on final goods and services

Question 3

Investment spending (I)

Answer 3

sum of the expenditures of business firms on new plant, equipment, software and households on new homes

Question 4

Government spending (G)

Answer 4

Refer to the goods and services purchased by all levels of government

Question 5

Net exports (X-IM)

Answer 5

difference between exports and imports; difference between what we sell to foreigners and what we buy from them

Question 6

Aggregate demand (AD) equals:

Answer 6

C + I + G + (X-IM)

Question 7

National income

Answer 7

before tax incomes
- the sum of the incomes that all individuals in the economy earn in the forms of wages, interest, rents, and profits; it excludes government transfer payments and is calculated before any deductions are taken for income taxes

Question 8

disposable income

Answer 8

after tax incomes
- sum of the incomes of all individuals in the economy after all taxes have been deducted and all transfer payments have been added

Question 9

National income and domestic product must _____ ______

Answer 9

be equal

Question 10

Transfer payments

Answer 10

sums of money that the government gives certain individuals as outright grants rather than as payments for services rendered to employers (for example, Social Security and unemployment benefits)

Question 11

Disposable income (DI) equals…

Answer 11

GDP - taxes + transfer payments

Question 12

Consumption function

Answer 12

shows the relationship between total consumer expenditures and total disposable income in the economy, holding all other determinants of consumer spending constant

Question 13

Marginal Propensity to Consume (MPC)

Answer 13

ratio of the change in consumption relative to the change in disposable income that produces the change in consumption; on a graph, it appears as the slope of the consumption function

Question 14

MPC=

Answer 14

Change in C / Change in DI that produces the change in C

Question 15

T/F Any change in disposable income moves us ALONG a given consumption function; a change in any of the other determinants of consumption shifts the ENTIRE consumption schedule

Answer 15

True

Question 16

Wealth increases

Answer 16

consumption curve moves up (to the left)

Question 17

Decrease price level

Answer 17

consumption curve moves down (to the right)

Question 18

Real interest rates

Answer 18

do not shift the consumption function because higher real interest rates do not always discourage spending and encourage saving

Question 19

Future income expectations rise/positive

Answer 19

consumption function rises upward (to the left)

Question 20

T/F Our imports rise when our GDP rises and falls when our GDP falls

Answer 20

True

Question 21

Exports depend on the GDP of _____ ______

Answer 21

other countries we are purchasing exports from

Question 22

When our economy grows faster than the economies of our trading partners, our net exports tend to shrink

Answer 22

Conversely, when foreign economies grow faster than ours, our net exports tend to rise

Question 23

A ____ in the prices of a country’s goods will lead to a reduction in that country’s net exports

Answer 23

rise

Question 24

A ______ in the prices of a country’s goods will raise that country’s net exports

Answer 24

decline

Question 25

Price increases abroad raise the _____ country’s net exports; price decreases abroad decrease the _____ country’s net exports

Answer 25

home; home