Keynesian Cross Chapter 12 Study Guide Flashcards
a point above the 45 degree ray shows that expenditures are blank than output produced
a point above 45 degree ray shows that expenditures are greater than output produced
when expenditures are greater than output produced (point above 45 degree ray), we expect inventories to blank
expenditures > output
inventories decrease
When inventories decrease, it is a signal to retailers to order blank than before
when inventories decrease, it is a signal to retailers to order more than before
once orders come in, manufacturers will blank production
once orders come in, manufactures will increase production
ultimately after manufactures increase production, blank will occur in GDP
ultimately, an increase in GDP will occur
what is the significance of the 45 degree ray?
shows all possible equilibrium positions
suppose consumptions is $10, government spending is $4, business investment is $5, and net exports are -$3. The MPC is 3/5. What is the amount of spending when income is 0?
the amount of spending when income is 0 = Consumption + government spending + business investment + net exports = 10 + 4 + 5 -3 = 16
Consumption 10 gov spending 4 business investment 5 net exports -3 MPC is 3/5 What is the equilibrium? Where does AE start? Where does Income start? How much does AE increase by? How much does income increase by?
What is the equilibrium? Make AE and Income Chart AE starts at 16 Income starts at 0 AE increases by 3 Income increases by 5 MPC = 3/5 aka AE increase is 3 and Income increase is 5 **when AE = INCOME you have reached equilibrium**
If potential GDP is $50, is the economy in a recession? Knowing that actual GDP is $40
Potential GDP > Actual GDP then you are in a recession
50 > 40
did not reach potential
If potential GDP is $50, how much should spending be changed to get to potential GDP?
how much should spending change = multiplier!
Multiplier = 1/(1-MPC)
1/(1-(3/5) = 5/2
Potential GDP - Actual GDP = Multiplier * Change in Government Spending
50 - 40 = (5/2)* Change in Gov Spending
4 = Change in Government Spending
Suppose that gov’t spending is reduced to $2. What is the new equilibrium?
Government spending is reduced by $2 therefore we start at when the amount of spending when income is zero aka 10 + 2 + 5 - 3 = 14
**2 is the new government spending instead of 4
Equilibrium is calculated when AE = INCOME
Do AE and Income Chart
Increase AE and Income according to the MPC
MPC = 3/5
Increase AE by 3 each time so 14 + 3, 17 +3 and so on
Increase Income by 5 each time so 0 + 5, 5 + 5, 10 + 5
increase until AE = Income aka equilibrium
What is the multiplier when government spending is reduced to $2?
Multipler = 1/(1- (MPC)
Suppose that GDP increases by $600 billion after an increase in spending of $100 billion. What is the multiplier?
Multiplier = change in GDP/ change in spending 600/100 = 6
if potential GDP is $500, the MPC is 4/5, the short-run equilibrium is $400, then how much must spending be change to reach equilibrium?
500 - 400 = 1/ (1 - (4/5)) * change in spending
100 = 5 * change is spending
change in spending = 20
Try the more practice problem on Study Guide Chapter 12
Problem 9
