ECON CH 8

Question 1

aggregate output (Y)

Answer 1

is the total quantity of goods and services produced (or supplied) in an economy in a given period

Question 2

aggregate income (Y)

Answer 2

is the total income earned by all factors of production in a given period

Question 3

closed economy without government

Answer 3

Y=AE=C+I

aggregate output=aggregate input

Question 4

household consumption

Answer 4

is the amount of spending by households on goods and services produced in our economy

Question 5

consumers spending behavior is determined by (3)

Answer 5

1. household income and wealth
2. interest rates
3. households expectations about the future

Question 6

keynes believed that household consumption is directly related to

Answer 6

its income

Question 7

aggregate consumption function

Answer 7

is the pos relationship between aggregate income (Y) and aggregate consumption ©

Question 8

marginal propensity to consume (MPC)

Answer 8

the fraction by which consumption increases when income increases, on average by a dollar

Question 9

the slope of the consumption function = change in consumption divided by change in aggregate income is

Answer 9

MPC

Question 10

aggregate consumption function

Answer 10

C=100+.75Y

Question 11

change in inventory cannot be planned by who

Answer 11

firms; it is determined by how much households decide to buy

Question 12

planned investment is

Answer 12

fixed; I=25, it does not change when income changes

Question 13

planned aggregate expenditure (AE)

Answer 13

is the total amount the economy plans to spend AE=C+I

Question 14

equilibrium

Answer 14

Y=AE

aggregate expenditure=aggregate income

Question 15

what would happen to output (Y) when AE changes (increases)?

Answer 15

output changes by more than AE does

Question 16

multiplier

Answer 16

is the ratio that determines by how much the equilibrium level of Y will change in response to a change in AE

Question 17

investment multiplier

Answer 17

is the change in output resulted from a change in investment

Question 18

the size of the multiplier depends on

Answer 18

MPC (the slope of the AE line)

Question 19

multiplier equation

Answer 19

1/1-MPC

Question 20

the size of the multiplier in the US economy is about

Answer 20

1.4

Question 21

business firms make decisions based on

Answer 21

inventory change

Question 22

the economy adjusts towards equilibrium in response to

Answer 22

firms` production adjustments (change in inventory helps the economy stay in equilibrium)

Question 23

production equation=

Answer 23

total sales+ change in inventory

Y= AE+change in inv

Question 24

change in inventory equation=

Answer 24

Y-AE

Question 25

if change in inventory is less than 0

Answer 25

then firms increase production

Question 26

if change in inventory is greater than 0

Answer 26

then firms reduce production

Question 27

if change in inventory=0

Answer 27

then firms keep producing the same