Krugman Textbook Chapter 11

Question 1

Marginal Propensity to Consume (MPC)

Answer 1

The increase in consumer spending when disposable income rises by $1. Usually sits between 0 and 1 because most people spend only part of their disposable income.

Question 2

Marginal Propensity to Save (MPS)

Answer 2

The fraction of an additional dollar of disposable income that is saved; equal to 1 - MPC.

Question 3

Autonomous Change in Aggregate Expenditure

Answer 3

An initial rise or fall in aggregate expenditure at a given level of real GDP.

Question 4

Multiplier

Answer 4

The ratio of total change in real GDP caused by an autonomous change in aggregate expenditure to the size of that autonomous change.

Question 5

Individual

Answer 5

An equation showing how an individual household’s consumer spending varies with the household’s current disposable income.

Question 6

Aggregate Consumption Function

Answer 6

The relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending.

Question 7

Planned Investment Spending

Answer 7

The investment spending that a firm intends to undertake during period. Planned investment spending may differ from actual investment spending due to unplanned inventory investment.

Question 8

Accelerator Principle

Answer 8

The proposition that a higher rate of growth in real GDP results in a higher level of planned investment spending, and a lower growth rate of real GDP leads to a lower planned investment spending.

Question 9

Inventory Investment

Answer 9

The value of the change in total inventories held in the economy during a given period. Can be negative if inventories fall.

Question 10

Unplanned Inventory Investments

Answer 10

Unplanned changes in inventories which occur when actual sales are more or less than business expected.

Question 11

Actual Investment Spending

Answer 11

The sum of planned investment spending and unplanned inventory investment.

Question 12

Planned Aggregate Expenditure

Answer 12

The total amount of planned spending in the economy; includes consumer spending and planned investment spending.

Question 13

Income-Expenditure Equilibrium GDP

Answer 13

The level of real GDP at which real GDP equals planned aggregate expenditure.

Question 14

Keynesian Cross

Answer 14

A diagram that identifies income-expenditure equilibrium as the point where the planned aggregate expenditure line crosses the 45-degree line.