Chapter 8 - Aggregate Expenditure and Output in the Short Run

Question 1

Aggregate expenditure / AE

Answer 1

Total spending in the economy : the sum of consumption, planned investment, government purchases, and net exports

Question 2

Aggregate expenditure model

Answer 2

A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming the price level is constant

Question 3

4 Components that make up AE

Answer 3

• Consumption (C)
• Planned Investment (Ip)
• Gov Purchases (G)
• Net Exports (NX)

Question 4

Planned aggregate expenditure Formula

Answer 4

Consumption + Planned Investment + Gov Purchases + Net Exports
OR
AE = C + Ip + G + NX

Question 5

Inventories :

Answer 5

Goods that have been produced but not yet sold

Question 6

The 5 most important variables that determine the level of consumption:

Answer 6

• Current disposable income
• Household wealth
• Expected future income
• Price level
• Interest rate

Question 7

Multiplier :

Answer 7

The increase in equilibrium real GDP divided by the increase in autonomous expenditure

Question 8

Autonomous expenditure :

Answer 8

An expenditure that doesn’t depend on the level of GDP

Question 9

Multiplier effect :

Answer 9

Process by which an increase in autonomous expenditure leads to a larger increase in real GDP

Question 10

Formula of multiplier

Answer 10

Change in real GDP / Change in investment spending

Question 11

Aggregate demand curve / AD Curve:

Answer 11

A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms and the gov.

Question 12

4 most important variable that determine the level of investment :

Answer 12

1. Expectations of future profitability
2. Interest rate
3. Taxes
4. Cash flow