Income-Expenditure Analysis and the Multiplier

Question 1

Calculations for aggregate expenditure

Answer 1

Consumption (C) + Investment (I) + Government Expenditures (G) + Net Exports (NX)

Question 2

In the Keynesian Cross Model detail what is meant when AE is equal to greater than or less than the real GDP.

Answer 2

When AE=Y planned spending equals output and output will remain constant.
When AE> Y there is excess demand in the economy and output will rise.
When AE< Y there is insufficient spending in the economy and output will fall.

Question 2

What is the Keynesian Cross model measuring?

Answer 2

Desired aggregate expenditure= actual national income (output)
Relation between desired aggregate expenditure and real GDP

Question 3

What’s the equation for disposable income?

Answer 3

Consumption + Savings

Question 4

Eqn: Marginal propensity to consume (MPC)

Answer 4

Change in consumption/ change in disposable income

Question 5

Eqn: Marginal propensity to save (MPS)

Answer 5

Change in savings/ change in disposable income

Question 6

Eqn: Average propensity to consume

Answer 6

consumption/ disposable income

Question 7

Eqn: Average propensity to save

Answer 7

savings/ disposable income

Question 7

Induced consumption

Answer 7

Consumption depending on disposable income

Question 8

Autonomous consumption (a)

Answer 8

Minimal consumption regardless of disposable income

Question 9

Whats the eqn for consumption?

Answer 9

Autonomous consumption (a) + (MPC x Yd)

Question 10

Variables that alter autonomous consumption

Answer 10

Wealth
Interest rate
Expectations about the future

Question 11

Determinants of desired investment

Answer 11

Real interest rate
Changes in sales
Expectations about the future

Question 12

Eqn: Investment expenditure

Answer 12

AE= C+ I
AE= (a+ MPC *Yd) + I

Question 13

Eqn: Taxes (T)

Answer 13

T= tax rate (t) * national Income (Y)

Question 14

What is budget deficit, balance and surplus?

Answer 14

Budget deficit is when tax revenue is less than government spending.
Budget balance is when tax revenue is the same as government spending.
Budget surplus is when tax revenue is greater than government spending.

Question 15

AE Eqn with all variables

Answer 15

Consumption (C) + Investment (I) + Government expenditure (G)= (a+ MPC * Yd) + I + G + (X-IM)
Yd= Y-T
Income-Taxes

Question 16

Determinants of net exports:

Answer 16

GDP
Foreign income
Relative international prices
Exchange rate

Question 17

Eqn: Multiplier

Answer 17

1/(1-AEslope)

Question 18

What is the idea behind the multiplier

Answer 18

When income rises it is multiplied by a certain amount to get the output.

Question 19

What are considered leakages in an economy?

Answer 19

Taxes, savings and spending on imports