Exam 2 Chapter 11

Question 1

The aggregate expenditure equilibrium model shows only ___ unemployment and no ___ unemployment.

Answer 1

• Natural

- Cyclical

Question 2

What is the does aggregate expenditure represent? (3 things)

Answer 2

• income
• GDP
• output

Question 3

What is the formula for aggregate expenditure?

Answer 3

Y = C + I + G + NX

Question 4

What 4 things can increase/decrease consumption under the aggregate expenditure approach?

Answer 4

• current income
• wealth
• expected future income
• interest rates on savings and borrowing

Question 5

The ___ is the fraction of the disposable income that is spent on consumption.

Answer 5

MPC (marginal propensity to consume)

Question 6

Is the marginal propensity to consume (MPC) higher for poorer or richer countries?

Answer 6

Poorer Countries

Question 7

Wealth, a factor that can increase/decrease consumption, is calculated how?

Answer 7

(Value of savings + checking accounts + value of stocks/bonds + value of house) - debts/loans

Question 8

Name 3 things that increase/decrease Investments of the aggregate expenditure equation

Answer 8

• business taxes
• expected profitability
• interest rates

Question 9

Name 5 things that increase/decrease Net Exports (NX) of the aggregate expenditure equation

Answer 9

• domestic income
• foreign income
• trade policies
• exchange rate of dollar compared to other currencies
• taste for foreign goods

Question 10

If domestic income increases, how is net exports affected?

Answer 10

Decreases because people have more a more money to buy imported goods

NX = Exports - Imports

Question 11

If foreign income increases, how is net exports affected?

Answer 11

Increases because foreign countries have more money to buy U.S. goods (U.S. exports them)

NX = Exports - Imports

Question 12

If the exchange rate of the dollar compared to other countries increases, how is net exports affected?

Answer 12

Decreases because people can buy more foreign goods with less money essentially (more goods imported)

NX = Exports - Imports

Question 13

___ is expenditure that is not affected by the current income (Y).

Answer 13

Autonomous Expenditure

Question 14

What is the formula for planned aggregate expenditure (PAE)?

Answer 14

PAE = C + planned I + G + NX

Question 15

Name the parts to this formula:

PAE = A + b·Y

Answer 15

A = autonomous expenditures (all spending except that to do with income)

b = marginal propensity to consume

Y = national income

Question 16

What are 2 things that increase/decrease government expenditures?

Answer 16

• belief about what a citizen needs

- stimulate or restrain the economy

Question 17

In the aggregate expenditure model, how do you get movement along the PAE line?

Answer 17

Change in Income (Y)

Question 18

In the aggregate expenditure model, what determines the PAE line’s slope?

Answer 18

MPC

-marginal propensity to consume

Question 19

___ is the amount that firms decide to put in formation of new capital and inventory accumulation.

Answer 19

Planned investment

Question 20

___ is the amount of new capital and actual inventory.

Answer 20

Actual investment

Question 21

The difference between PAE and Y is the same as the difference between what?

Answer 21

Planned Inventory - Actual Inventory

Question 22

What represents the keynesian equilibrium?

Answer 22

Where PAE = Y

Where planned inventories = actual inventories

Question 23

A ___ occurs when equilibrium aggregate expenditure is below the level needed for full employment.

Answer 23

recessionary output gap

Question 24

An ___ occurs when equilibrium aggregate expenditure is above the level needed for full employment.

Answer 24

inflationary output gap