Goods market

Question 1

What is the composition of AD?

Answer 1

Z= C+I+G+(X-M)

Question 2

What is the consumption function?

Answer 2

C=c^o+c^1Yd

Question 3

I and G are …. variables

Answer 3

Exogenous

Question 4

What is Yd?

Answer 4

Disposable income (income after tax)

Question 5

What is c^1?

Answer 5

The marginal propensity to consume

Question 6

What is c^0?

Answer 6

The autonomous consumption

Question 7

Explain MPC

Answer 7

The effect of an additional increase in income on consumption.

Question 8

What does equilibrium in the goods market require?

Answer 8

Production (Y) is equal to demand for goods (Z)

Question 9

What is income (Y) in terms of autonomous spending and the multiplier?

Answer 9

Y=1/(1-c^1)(c^o+I+G-c^1T)

Question 10

What is autonomous spending?

Answer 10

(c^o+I+G+c^1T)

Question 11

What does autonomous spending imply?

Answer 11

The demand for goods that does not depend on output

Question 12

What is the multiplier in algebraic form?

Answer 12

1/(1-c^1)

Question 13

What is the multiplier?

Answer 13

It is the sum of successive increases in production resulting from an increase in demand

Question 14

What is the effect of an increase in autonomous spending?

Answer 14

There is an increase in production equal to that of autonomous spending times the multiplier

Question 15

What happens with an increase in demand?

Answer 15

Leads to an increase in production and a corresponding increase in income (demand determines production)

Question 16

What does the size of the multiplier depend on?

Answer 16

The MPC

Question 17

How long does it take for output to adjust?

Answer 17

Instantaneously

Question 18

Is the model in the long run or short run?

Answer 18

Short run

Question 19

What is happening in equilibrium?

Answer 19

Output equals autonomous spending times the multiplier

Question 20

What is the other assumption for equilibrium in the short run?

Answer 20

Investment equals savings

Question 21

If government spending is increased but taxes are fixed, what happens to the budget?

Answer 21

It goes into deficit

Question 22

If taxes and government spending increase at the same time, it is called a …

Answer 22

Balanced budget

Question 23

What is the change in Y from a balanced budget fiscal policy?

Answer 23

(1/(1-c^1))change in G - (c^1/(1-c^1))change in T

Question 24

What an automatic stabiliser?

Answer 24

The economy responds less to changes in autonomous spending (than in the case where taxes are independent of income). So output tends to vary less.