Macro: Chapter 3: The Goods Market

Question 1

6 Items in GDP

Answer 1

• Private consumption (C)
• Gross private fixed investment (I)
• Government spending (G)
• Net exports (X & IM)
• Inventory Investment
• Residual Items

Question 2

Consumption

Answer 2

Goods and services purchased by consumers.

Question 3

Investment: 2 Components

Answer 3

• Non-residential investment

- Residential investment

Question 4

Not included in government spending:

Answer 4

Government transfers (Social grants, interest on debt).

Question 5

Inventory investment

Answer 5

Difference between goods produced and goods sold in a given year.

Question 6

Demand for goods (Z) as an identity:

Answer 6

Z ≡ C + I + G + X - IM

Question 7

Consumption function

Answer 7

C = c0 + c1 Yd

Question 8

Marginal propensity to consume

Answer 8

Gives the effect an additional rand of disposable income has on consumption.

Question 9

Disposable income, Yd

Answer 9

Income minus taxes paid (less government transfers received).
Yd ≡ Y - T

Question 10

Autonomous spending

Answer 10

The part of the demand for goods that does not depend on output.
c0 + Ī + G - c1T

Question 11

Balanced budget

Answer 11

Taxed equal government spending.

T = G

Question 12

Multiplier

Answer 12

1/(1-c1)

Question 13

Econometrics

Answer 13

Set of statistical methods used in economics

Question 14

Private saving

Answer 14

Equals consumers disposable income minus their consumption:
S ≡ Yd - C
S ≡ Y - T - C

Question 15

Public saving

Answer 15

Taxes (net of transfers) minus government spending

T - G

Question 16

IS relation

Answer 16

Equilibrium in the goods market requires that investment = saving:

I ≡ S + (T - G)

(sum of public and private saving).
Derived from the demand for goods identity.

Question 17

2 Ways of stating condition for equilibrium in the goods market

Answer 17

Production = Demand
Investment = Saving

Question 18

Propensity to save

Answer 18

1 - c1
(1 - propensity to consume)
Tells us how much of an additional unit of income people save.