Midterm 1: Chapter 12 pages 370-394

Question 1

Aggregate Expenditure Model

Answer 1

A macroeconomic model that focuses on the short run relationship between total spending and real GDP; ASSUMES PRICE LEVEL IS CONSTANT

Question 2

in any particular year the level of GDP is determined mainly by

Answer 2

level of aggregate expenditure

Question 3

John Maynard Keynes

Answer 3

Wrote “The General Theory of Employment, Interest and Money” - analyzed relationship between AE and GDP

Question 4

What were the four components of aggregate expenditure identified by Keynes

Answer 4

1. Consumption (C) spending by households on goods and services
2. Planned Investment (I) spending of firms on capital goods, research and development
3. Government purchases (G) spending by local, state and federal gov on goods and services
4. Net Exports (NX) imports - exports

Question 5

what are inventories

Answer 5

Goods that have been produced but not yet sold

Question 6

What’s included in investment spending

Answer 6

Changes in inventories, spending on machinery, equipment, office buildings, factories

Question 7

When will actual investment be greater than planned investment

Answer 7

when there’s an unplanned increase in inventories

Question 8

When will the actual investment be less than planned investment

Answer 8

when there’s an unplanned decrease in inventories

Question 9

When will actual investment and planned investment be equal

Answer 9

No unplanned changes in inventories

Question 10

When does equilibrium occur in AE model

Answer 10

when total spending, or aggregate expenditure, equals total production/GDP

Question 11

When aggregate expenditure is greater than GDP

Answer 11

spending in economy is greater than total amount of production, causing inventories to decline, which will result in more employment and a GDP increase

Question 12

When aggregate expenditure is less than GDP

Answer 12

spending in economy is less than production, causing increase in inventories, nd resulting in less GDP and employment

Question 13

what is the largest component of the aggregate expenditure

Answer 13

consumption

Question 14

Five most important variables that determine level of consumption

Answer 14

1. Current disposable income,
2. household wealth
3. expected future income
4. the price level
5. the interest rate

Question 15

what happens as disposable income goes up

Answer 15

spending goes up to AE increase

Question 16

what happens when wealth increases

Answer 16

price of one’s house or stocks increase, causing an increase in spending and AE

Question 17

what happens when price level increases

Answer 17

the real value of your wealth decreases so spending decreases

Question 18

What happens when interest rates are high

Answer 18

the reward to save is increased, causing less spending and more saving,

Question 19

what is real interest rate equal to and what is its effect on durable goods

Answer 19

the real interest rate is equal to the nominal interest rate minus inflation, and the higher it is less people consume on durable goods

Question 20

what is Marginal Propensity to Consume (MPC)

Answer 20

the slope of the consumption function on the graph; it’s how much consumption changes when disposable income changes

Question 21

what is equation for MPC

Answer 21

(change in consumption / change in disposable income)

Question 22

Equation for disposable income

Answer 22

national income - net taxes

Question 23

What is National income equal to

Answer 23

GPD = Disposable income + net taxes

also Consumption + Savings + taxes

Question 24

Marginal Propensity to save (MPS)

Answer 24

how much savings change when disposable income goes up

Question 25

What always equals 1 when taxes are constant

Answer 25

MPC + MPS