ECON 200 Handout 7 (First 2.25 Pages)

Question 1

Circular Flow of Macroeconomic Activity

Answer 1

One person’s spending is another’s income, which finances more spending and, therefore, more income, and so on

Question 2

Short-Run Analysis

Answer 2

The analysis of how different events affect an economy before prices have had time to adjust

Question 3

The Keynesian Cross Model

Answer 3

Y=C+I+G+X-M
Y=Nation’s Output
C=Households that consume a nation’s output
I=Businesses that conduct investment
G=The government that makes purchases
X=The foreign sector in which foreigners buy domestic exports
M=Domestic residents that purchase foreign goods

Question 4

The Keynesian Cross Model Part 2

Answer 4

Y=C+I^d+I^ud+G+X-M
E=C+I^d+G+X-M
Y=E+I^ud
I^d=Desired Investment
I^ud=Undesired Investment
E=Economy's planned expenditures

Question 5

Consumption Function

Answer 5

C=Co+mpc(Y-T)=Co+mpc(Y-tY)=Co+mpc(Y(1-t))
Co=Autonomous Consumption
mpc=Marginal Propensity to Consume
t=Tax Rate

Question 6

Autonomous Consumption

Answer 6

The component of consumption that is autonomous with respect to income, but not with respect to wealth

Question 7

Marginal Propensity to Consume

Answer 7

The fraction of disposable income that is spent on consumption

Question 8

Import Function

Answer 8

M=mpm(Y(1-t))

mpm=Marginal Propensity to Import

Question 9

Marginal Propensity to Import

Answer 9

The fraction of disposable income that is spent on importations

Question 10

Exogenous Variables

Answer 10

Variables in the model whose value is assumed in the construction of the model

Question 11

Endogenous Variables

Answer 11

Variables whose values depends on how they are related to the exogenous variables in the model

Question 12

Autonomous Spending

Answer 12

The sum of the exogenous injections of spending into the market’s circular flow

Question 13

Autonomous Spending Multiplier (Injections Multiplier)

Answer 13

Multiplies the autonomous spending to produce Y* (Equilibrium level of Y)