Macro Economics Chapter 09 Power Point Flashcards
What is the purpose of this chapter?
To complete the Keynesian model by adding the government and the foreign sector.
Why is government spending an autonomous expenditure?
Government spending can be the result of political decisions regardless of national output.
Why is net exports assumed to be negative?
Spending for imports usually exceeds the value of exports.
What does the term equilibrium mean?
Equilibrium is the point toward which the economy tends.
In the Keynesian model, where is the equilibrium level of GDP?
It is where the value of goods and services produced is equal to the spending for these goods and services.
What is the aggregate expenditures formula?
Aggregate expenditures = C + I + G + (X-M)
How do aggregate expenditures affect the economy?
They pull aggregate output either higher or lower toward equilibrium.
What causes a decrease in real GDP and employment?
Excessive inventories.
Why do excessive inventories cause unemployment?
Firms will cut back production and lay off workers in order not to add to inventories excessively.
What causes an increase in GDP and employment?
Inventory depletion.
What happens when inventories decline too much?
Firms will increase production and hire more workers to meet the demand for their product.
What is the aggregate expenditures-output model?
It determines the equilibrium level of real GDP by the intersection of aggregate expenditures and aggregate output.
How can full employment be reached with aggregate expenditure?
The aggregate expenditure curve must be shifted upward until the full-capacity output is reached.
What is the spending multiplier?
Any initial increase in spending will lead to a multiple increase in GDP.
Initial increase in government spending operates though _______ and leads to a larger increase in ______ ___?
-Operates through a multiplier- Larger increase in real GDP
How does the multiplier work?
Any initial change in spending causes a chain reaction of more spending.
What is the Marginal Propensity to Consume?
MPC is the change in consumption spending resulting from a given change in income.
What is the Marginal Propensity to Save?
MPS is the fraction of any change in real disposable income that households save.
What is the relationship between MPC and MPS?
MPC + MPS = 1
What is the formula for the multiplier?
1 / (1 – MPC)(or)1 / MPS
If the MPS is 1/2, what is the multiplier?
1 / MPS = 1 / 1/2 = 2
What is the GDP gap?
The difference between full employment real GDP and actual real GDP
What is a recessionary gap?
The amount by which aggregate expenditures fall short of the amount required to achieve full employment equilibrium.
What is the Keynesian remedy for a recessionary gap?
Increase autonomous spending by the amount of the recessionary gap.
What can the government do to close a recessionary gap?
•Increase government spending•Lower taxes•Raise transfer payments
What is an inflationary gap?
The amount by which aggregate expenditures exceed the amount required to achieve full employment equilibrium.
What is the Keynesian remedy for an inflationary gap?
Reduce spending by the amount of the inflationary gap.
How can the government close an inflationary gap?
•Cut government spending•Increase taxes•Reduce transfer payments
