Chapter 8: Economic Model

Question 1

Fiscal Policy

Answer 1

• When the Govt. intervenes in the market place that manages government spending (G) and government taxes (T)
• Controlled by Congress
• Affects the goods and services market

Question 2

Monetary Policy

Answer 2

• Federal Reserve controls the supply of money that interacts with supply and demand and determines the interest rate
• Affects the money market

Question 3

Consumption Function (C)

Answer 3

C = a+bY
C = Consumption
a = autonomous consumption
b = marginal propensity to consume (MPC) slope = change in C/change in Y
Y = Income/output (GDP)

Question 4

Saving

Answer 4

Flow measure: Amount of $ in a given time

Question 5

Savings (with a “s”)

Answer 5

• Stock value: No time dimension
• Amount of $ in the bank (savings account)
• All of the previous saving added up

Question 6

Saving Function

Answer 6

S = -a+(1-b)Y
S = saving
a = autonomous consumption 
1-b = marginal propensity to save (MPS) = 1 - marginal propensity to consume (MPC) = Slope
Y = Income/output (GDP)

Question 7

Net Private Investment (I)

Answer 7

I = I (with line on top)
I = Planned investment: Planned editions to capital
I (with line on top) = Some given number

Question 8

Unplanned change in inventories

Answer 8

• When # produced > # sold (positive # leftover, +saving) reduce # output/products produced
• When # produced < # sold (negative # leftover, -saving; dissaving) increase output
• = AE - Y

Question 9

Planned Investment and Consumption

Answer 9

Y = C + I
Y = Income/output
C = Consumption 
I = Planned investment

Question 10

Planned Aggregate Expenditure (AE)

Answer 10

AE =- C + I
AE = Planned aggregate expenditure: Total amount the economy plans to spend in a given period of time
=- (three lines): will always equal
C = Consumption
I = Planned investment

Question 11

MPC + MPS =- 1

Answer 11

MPC + MPS =- 1
MPC = Marginal propensity to consume = slope: change in consumption (C)/change in income (Y)
MPS = Marginal propensity to save = slope: change in saving (S)/change in income (Y)
=- (three lines): will always equal

Question 12

In our model of the of the goods and services market, output (Y) is equal to planned aggregate expenditure (AE)…

Answer 12

At equilibrium

Question 13

In our model of the goods and services market, if output (Y) is > than aggregate expenditure (AE) then

Answer 13

Unplanned changes in inventories are positive

Question 14

Fiscal policy refers to

Answer 14

The spending and taxing policies use by government to influence the economy

Question 15

More Saving equations

Answer 15

S = Y-C and S = Y-AE