Lecture Tuesday 7 Sep

Question 1

What does the (neo) classical explanation of the short run say?

Answer 1

Adjustments in prices would automatically demand tend to the full employment level in the long run.
This is a self-correcting process which means that when demand is greater than supply, prices rise until demand equals supply. When supply is greater than demand, prices drop until demand equals supply.

Question 2

What does Keynes say?

Answer 2

Prices are preset and the adjustment comes from demand. In the short run, firms meet demand for products at fixed prices

Question 3

What is planned aggregate expenditure?

Answer 3

This is the planned total spending on final goods and services

Question 4

Spending, in the short run, may not be sufficient to support a _______ level of output

Answer 4

normal

Question 5

Recessionary gaps are caused by insufficient _______ spending

Answer 5

aggregate

Question 6

What are the four components of planned aggregate expenditure?

Answer 6

• consumption
• planned investment
• government spending
• net exports

Question 7

Define consumption component of PAE

Answer 7

This is consumption of goods (durable and non-durable) and services

Question 8

Define planned investment component of PAE

Answer 8

Investment is the spending by domestic firms on new capital goods such as office buildings, factories and equipment. Spending on new houses and apartment buildings and increases in inventories are all part of investment.
Planned investment is the firm’s planned investment

Question 9

Define the government spending component of PAE

Answer 9

This is purchases by the government on goods and services such as new schools and hospitals, roads and employee wages.

Question 10

Define the net export component of PAE?

Answer 10

exports - imports

Question 11

What is the equation for planned aggregate investment?

Answer 11

PAE = C + I^P + G + NX

Question 12

Components of planned aggregate expenditure can be decomposed into what two types of expenditure?

Answer 12

• autonomous

- induced

Question 13

Define autonomous expenditure

Answer 13

These are components of PAE that don’t change when output (income) changes

Question 14

What are the four examples of autonomous expenditure?

Answer 14

1. planned investment
2. government purchases or spending
3. exports
4. components of consumption and imports that are not influenced by output

Question 15

Define induced expenditure

Answer 15

these are components of PAE that change when output (income) changes; specifically, consumption and import expenditure that vary with output

Question 16

Which are the two examples of induced expenditure?

Answer 16

1. consumption

2. imports

Question 17

What makes up consumption?

Answer 17

autonomous consumption and induced consumption (mpc x Yd)

Question 18

Induced consumption is given by mpc x Yd. What do these mean?

Answer 18

mpc is the marginal propensity to consume and Yd is disposable income

Question 19

What makes up imports?

Answer 19

autonomous imports and induced imports (m x Y)

Question 20

Induced imports is given by m x Y. What do these mean?

Answer 20

m is the marginal propensity to import and Y is the output/income

Question 21

In the Keynesian model, output is determined by what?

Answer 21

PAE

prices are preset

Question 22

Actual expenditures may not always be equal to PAE.However, what components of PAE do we assume panned = actual?

Answer 22

C
G
NX

Question 23

Which component of PAE do we say that actual does not = planned? Why is this?

Answer 23

planned investment may not equal actual investment since unsold inventories are included in actual investment (I).

Question 24

What causes inventories to be larger than expected?

Answer 24

actual sales are less than expected

Question 25

What causes inventories to be smaller than expected?

Answer 25

if actual sales are greater than expected

Question 26

Actual aggregate expenditure (Y) is always equal to what?

Answer 26

real GDP