Chapter 8: Aggregate Expenditure and Output in the Short Run

Question 1

What are the four components of aggregated expenditure

Answer 1

Consumption, planned investment, government purchases and net exports

Question 2

What is macroeconomic equilibrium?

Answer 2

When total spending = total production

Question 3

What determines consumption

Answer 3

• current disposable income
• household wealth
• expected feature income
• Price level
• interest rate

Question 4

Factors that effect planned investment

Answer 4

• Expectations of future profits
• Interest Rate
• Taxes
• Cash Flow

Question 5

What determines government purchases

Answer 5

Federal, provincial, local governments for goods and services and investment made by government

Question 6

what factors effect net exports

Answer 6

• Price level in Canada relative to the price level in other countries
• Growth rate of GDP in Canada relative to growth rates in other countries
• Exchange rate between the Canadian dollar and other countries

Question 7

What are the 4 key points of the multiplier effect

Answer 7

• The multiplier effect occurs both when autonomous expenditure increases and when it decreases
• The multiplier effect makes the economy more sensitive to changes in autonomous expenditure than it would be otherwise
• The larger the MPC, the larger the value of the multiplier
• The formula for the multiplier is oversimplified because it ignores many real world complications

Question 8

The paradox of thrift

Answer 8

If many households decided at the same time to increase their saving and reduce their spending, the make themselves worse off by causing aggregated expenditure to fall, thereby pushing the economy into a recession