Midterm 2

Question 1

factors of income that affect consumption 4

Answer 1

• amount of wealth owned by households
• borrowing
• expectations of future prices and incomes
• real interest rates and taxes

Question 2

consumption schedules are

Answer 2

relatively stable

Question 3

immediate determinants of investment

Answer 3

-expected rate of return
- real interest rate

Question 4

investment demand curve is found by

Answer 4

summing investment projects, arranging in decending order according to the expected rate of return and graphing. Applying the rule that investment will be profitable up until point that the real interest rate (i) = expected rate of return (r)

Question 5

investment demand curve shape

Answer 5

negative or inverse relationship between interest rate and level of aggreagte investment

Question 6

shifts of investment demand curve happen by 6

Answer 6

• the acquisition, maintenance, and operating costs
• business taxes
• technology
• stocks of captial goods on hand
• planned inventory changes
• expectations

Question 7

the multiplier

Answer 7

is the reciprocal of MPS
the greater the MPS, the smaller the multiplier
the greater the MPC, the greater the multiplier

Question 8

difference between APC and MPC

Answer 8

APC is measure of how much disposable income is spent on average
MPC is the measure of how much consumption chnages when income changes

Question 9

What is the exception to the consumption schedule

Answer 9

personal taxes. when this occurs consumption and savings move in the same direction which is opposite of the taxes

Question 10

how is it possible for investment spending to increase even when real interest rates are increasing

Answer 10

as long as expected rates of return rise faster than real interest rates, interest spending may increase. most likely overal long periods of economic growth.

Question 11

What are the variables on consumption and saving schedules and the relationship

Answer 11

consumption scjedule- consumption on y disposable income on x. pos related
saving schedule- saving on y, disposable income on x. pos realtionship

Question 12

what will happen to investment when inventories are increasing

Answer 12

investment demand curve shifts right because increaing inventory is considered an investment

Question 13

is gross GDP more variable than real GDP

Answer 13

yes. Real GDP is not variable

Question 14

aggregate expenditures model views as what

Answer 14

total spending in economy as primary factor in determining level of real GDP
assuming prices are fixed.
keynes made this model after the great depression

Question 15

investment schedules show what

Answer 15

how much investment the firms in an economu are collectively planning to make at each level of GDP

Question 16

investment is a what

Answer 16

constant value and same at all levels of GDP

Question 17

where is the investment constant derived from

Answer 17

derived from the investment demand curve by determining what quanitiy of investment will be determined at the economys current interest rate

Question 18

for a private closed econonmy…

Answer 18

equilibrium GDP occurs where aggreagte expenditres and real output are the same (where C + Ig intersect the 45 degree angle)

Question 19

at a level where GDP exceeds equilibrium

Answer 19

real output will exceed aggregate spending resulting in investment inventories and decline in output, and decline in income (GDP)

Question 20

at equilibrium GDP

Answer 20

-saving ss and amount business plan to invest are equal
- no unplanned chnages in inventories occur

Question 21

an exces of savings will cause

Answer 21

a shortage of total spending, causing a fall in GDP

Question 22

the change in GDP will correct what

Answer 22

the discrepancy between saving and planned investment

Question 23

when do unplanned inventories occur

Answer 23

when aggregate expenditres diverge from GDP. followed by a cut in production and a decline of real GDP

Question 24

investment schedule vs investment demand curve

Answer 24

investment schedule shows the level of investment spending for a given GDP. Depends on GDP (positive relationship)

investment demand curve shows the rates of profit and real interest rates for a given level of GDP. does not depend on GDP (straight across)

Question 25

When C+Ig > GDP

Answer 25

accumulate unplanned inventories

Question 26

when C + Ig < GDP

Answer 26

run out of inventories faster than planned

Question 27

At equilibrium GDP the inventories

Answer 27

there are no unplanned investment including no unplanned inventory changes

Question 28

in a private closed economy aggregate expenditures are

Answer 28

C and Ig
AE= C + Ig
GDP = C+Ig

Question 29

the aggregate demand curve is downward becuase 3

Answer 29

-interest rate effect
-real balances effect (as price level rises the real value (pruchasing power) decreases
- foreign purchase effect (as our own price levels rise we will import more)

Question 30

short run aggregate supply

Answer 30

• output prices are flexible, input prices are inflexob;e

Question 31

immediate short run aggregate supply

Answer 31

fixed prices
- horizzontal line

Question 32

long run aggregate supply

Answer 32

output is fixed, verticle line