Keynesian Cross

Question 1

Define aggregate expenditure.

Answer 1

Aggregate expenditure is the sum of all planned or voluntary spending on domestically produced goods and services

Question 2

What is the difference between exogenous and endogenous?

Answer 2

Exogenous is something generated from outside the model, where as endogenous will be explained within the model

Question 3

Is G, NX and I endogenous or exogenous?

Answer 3

Exogenous

Question 4

What is the implication of G, NX and I being exogenous?

Answer 4

We can assume them and keep them as a constant

Question 5

Define marginal propensity to consumer.

Answer 5

The marginal propensity to consumer says by how much consumption rises if income rises by one unit

Question 6

What is C equal to? And why?

Answer 6

C = cY, you only want to consumer a proportion of your income

Question 7

What is the consumption function?

Answer 7

C = cY

Question 8

What is the aggregate expenditure identity using c?

Answer 8

AE = cY + I + G + NX

Question 9

Define actual expenditure.

Answer 9

Actual expenditure is the sum of all categories of demand, including unplanned investment

Question 10

How can you derive the aggregate expenditure line on a graph?

Answer 10

Add horizontal lines for each of the assumed constant variable, I, G and NX and then draw a straight line outwards from the top point showing cY

Question 11

What two curves does the Keynesian cross show?

Answer 11

Aggregate expenditure, AE, and actual expenditure, AE = Y

Question 12

Where is the equilbrium shown on the Keynesian cross?

Answer 12

Where the two lines intercept

Question 13

Draw a Keynesian cross.

Answer 13

Picture

Question 14

How is the aggregate expenditure line affected if you increase government expenditure?

Answer 14

With with shifted upwards by ∆G

Question 15

If you increase G, why is ∆Y > ∆G?

Answer 15

The multiplier effect

Question 16

Explain why if you increase ΔG by 1, however the change in income is greater.

Answer 16

The additional unit of G by 1 unit it will shift the AE line upwards by one unit.
Which increases the old income level by one unit
Consumers plan to spend a fraction c for their first round income increase
Which increases the income by c
This process continues and you keep adding c^n onto the income
And so by increasing G by on unit you will have increased Y by 1 + c + c^2 + c^3 ….

Question 17

What is the ∆Y multiplier?

Answer 17

1/1-c

Question 18

Deine multiplier.

Answer 18

The multiplier measures the income change resulting from a one-unit increase in autonomous expenditure

Question 19

What is the tax equation?

Answer 19

T = tY

Question 20

Define disposable income.

Answer 20

Disposable income is the part of income left to households after the payment of taxes

Question 21

What does t stand for?

Answer 21

The marginal and average income tax rate

Question 22

Define marginal income tax rate.

Answer 22

The marginal income tax rate says by how much taxes rise if income rises by one unit

Question 23

Define average income tax rate.

Answer 23

The average income tax rate gives the share of taxes on income on average

Question 24

Name three things proportional to income?

Answer 24

Consumption, taxes and imports

Question 25

What is the import function?

Answer 25

IM = mY

Question 26

If we assume consumption, taxes and imports are proportional to income what s the equation for AE?

Answer 26

AE = [c(1-t) - m]Y + I + G + EX

Question 27

How does using this equation: AE = [c(1-t) - m]Y + I + G + EX change the slope of the AE?

Answer 27

Flatter

Question 28

If we use this equation AE = [c(1-t) - m]Y + I + G + EX how does the multiplier change?

Answer 28

1/([c(1-t) - m])

Question 29

How can you find the multiplier given the AE equation?

Answer 29

Rearrange for Y and then differentiate

Question 30

Draw a graph for the investment against expected return.

Answer 30

Picture

Question 31

What is the investment function?

Answer 31

I = Ī - bi

Question 32

What does Ī stand for?

Answer 32

The part of investment which depends if the person is optimistic or pessimistic - expected further income

Question 33

What does b stand for?

Answer 33

Sensitivity of investment

Question 34

What does i stand for?

Answer 34

Interest rate

Question 35

On a graph of investment against expected return would you partake in investments above or below the interest rate?

Answer 35

Above