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Macro > Test 2: Chapters 21 + 22 > Flashcards

Test 2: Chapters 21 + 22 Flashcards

1
Q

What is the formula for planned aggregate expenditure (AE)?

A

AE = C + I + G + (x-IM)

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2
Q

What do we assume in the simple model?

A
  • No trade
  • No government
  • No taxes
  • Prices are fixed (P=P0)
    So only C + I exists in the simple model
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3
Q

What are autonomous expenditures?

A

Do not depend on national income.

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4
Q

What are induced expenditures?

A

Depend systematically on national income.

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5
Q

What is the formula for national output?

A

y = c + s

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6
Q

What is the formula for savings?

A

s = y - c

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7
Q

Define disposable income. What’s the formula?

A
  • After tax income

Yd = Y - T

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8
Q

What are the factors affecting desired consumption (c)?

A
  • Income (y): when y goes up, c goes up
  • Wealth (w): when w goes up, c goes up
  • Interest rate (i): when i goes up, c goes down
  • Expectations about future: c can go up or down
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9
Q

What is the consumption function?

A

c = a + bYd (linear)

Yd = Y = disposable income
a = autonomous consumption (value of consumption when Yd is 0 - intercept)
b = induced consumption (amount by which c changes in response to a 1 unit change in Yd - slope)

If Yd goes up by $1 p, c goes up by $b

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10
Q

What is the marginal propensity to consume (MPC)?

A

The fraction of additional disposable income spent on additional consumption.
Slope of consumption function.

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11
Q

What is the formula for MPC?

A

MPC = change in c / change in Yd (=b)
-b (k)

0 < MPC < 1

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12
Q

What is the average propensity to consume (APC)?

A

The proportion of disposable income households want to consume.

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13
Q

What is the formula for APC?

A

APC = c/Yd

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14
Q

What is the saving function?

A

s = -a + (1-b) Yd

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15
Q

What is the marginal propensity to save (MPS)?

A

The fraction of additional disposable income spent on savings.
Slope of saving function.

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16
Q

What is the formula for MPS?

A

MPS = change in s / change in Yd (= (1-b) )
MPS = 1-MPC
0 < MPS < 1

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17
Q

What is the average propensity to save (APS)?

A

APS = s/Yd

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18
Q

What is APC added to APS?

A

APC + APS = 1

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19
Q

How do you find Yd at c=Yd?

A 
s = -30 + 0.2Yd
0 = -30 + 0.2Yd
Yd = 150
OR
c = Yd = 30 + 0.8Yd
Yd - 0.8Yd = 30
Yd = 150
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20
Q

What are other factors affecting consumption and saving?

A
  • Wealth (w)
  • Interest rate (i)
  • Future expectations (exp)
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21
Q

When c shifts up, what happens to s, w, i, and exp?

A 
c up
s down
w up
i down
exp up
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22
Q

When c shifts down, what happens to s, w, i, and exp?

A 
c down
s up
w down
i up
exp down
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23
Q

What is desired investment (I)?

A

Spending by firms on…

  1. inventory changes
  2. residential construction
  3. plant and equipment
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24
Q

What is the desired investment affected by?

A
  • Real interest rate (r)
  • Change in sales
  • Business confidence
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25
Q

What is the real interest rate (r)?

A

The opportunity cost of borrowing instead of using their (firm) own money.

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26
Q

What happens when the real interest rate goes up?

A
  • Cost more to hold inventory
  • Affects housing demand
  • More expensive to borrow
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27
Q

How does the real interest rate affect I?

A

r up, I down

r down, I up

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28
Q

How does change in sales affect I?

A

Usually the higher (lower) the level of sales, the larger (smaller) the desired stock of inventory.

sales up, I up
sales down, I down

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29
Q

How does business confidence affect I?

A

When firms expect the economy to be good (bad) in the future, they will increase (decrease) I.

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30
Q

If plan for 100K but actual is 90K…

A

10K unplanned inventory investment.

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31
Q

If plan for 100K but actual is 110K…

A

10K unplanned inventory disinvestment.

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32
Q

What form does the AE equation take?

A

AE = A + zY

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33
Q

What is z?

A

The marginal propensity to consume (out of national income).

The additional AE as a result of a change in Y.

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34
Q

What is the formula for the marginal propensity to spend (z) in the simple model?

A 
z = change in AE / change in Y
z = b = MPC
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35
Q

When does equilibrium (Y*) occur?

A

When Y = AE

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36
Q

What is the formula for the inventory adjestment?

A

Y - AE

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37
Q

What happens when AE > Y?

A

This is an unexpected drop to inventory, firms wish to replace inventory (actual).
Y will increase and does so as long as AE > Y or until Y = AE at initial equilibrium (E0)

38
Q

What happens when AE < Y?

A

This is an unexpected rise in inventory, firms now produce less (actual).
Y will decrease and does so as long as AE < Y or until Y = AE at E0.

39
Q

How do you find Y*?
C = 30 + 0.8Yd
I = 75
T = 0

A 
AE = C + I
AE = 30 + 0.8Y + 75
AE = 105 + 0.8Y

Impose Y = AE
Y = 105 + 0.8Y

Solve for Y = Y*
Y - 0.8Y = 105
0.2Y = 105
Y* = (1/0.2) (105)
Y* = 525
40
Q

How does equilibrium output (Y) change in response to a change in some autonomous variable (say investment)?

A

By an amount equal to the multiplier.

41
Q

What is the formula for the autonomous expenditure multiplier?

A

change in Y / change in A

42
Q

What is the formula for the investment multiplier?

A

change in Y / change in I

43
Q

What is the formula for the simple model multiplier?

A

k = 1 / 1-z (1/1-b = 1/1-MPC = 1/MPS)

44
Q

What is the formula for Y*?

A

Y* = 1/1-b (a+I)

45
Q

What is the formula for AE1 in the simple model?

A

AE1 = AE + change in I (or change in C?)

46
Q

How do you find Y*new?

A 
Y = AE
Y = 130+0.8Y
Solve for Y = Y*new
Y - 0.8Y = 130
0.2Y = 130
Y*new = (1/0.2) (130)
Y*new = 650
47
Q

What is the formula for the change in Y in the simple model?

A

change in Y = 1/1-b (change in I)

change in Y = k (change in I)

48
Q

What is the formula for Y*new?

A

Ynew = Y + change in Y

49
Q

What is the size of the multiplier?

A

The larger (smaller) is z, the steeper (flatter) is the AE equation and the larger (smaller) is k.

50
Q

What are government expenditures (G)?

A

desired and given as autonomous.

51
Q

What is net total revenue?

A

Net total revenue = total tax revenue - transfer payments

52
Q

What is the formula for taxes (T)?

A

T = T0 = tY
T0: autonomous taxation
t: tax rate (if t=0.2, 20% of y is taxed)

53
Q

What is the formula for budget balance (BB)?

A

BB = T - G

54
Q

What does anything that is autonomous depend on?

A

Level of income.

55
Q

What does anything that is induced depend on?

A

Not the level of income.

56
Q

When are we in a surplus?

A

If BB > 0

57
Q

When are we in a deficit?

A

If BB < 0

58
Q

When do we have a balanced budget?

A

If BB = 0

59
Q

What is the formula for AE in the less than simple model?

A

AE = C + I + G

60
Q

What is the formula for Y* in the less than simple model?

A

Y* = 1/1-b(1-t) (a + I + G - bT0)

61
Q

What is fiscal policy?

A

Government’s ability to spend and tax.

62
Q

What is the government multiplier?

A

k = change in Y / change in G

63
Q

What is the formula for the change in Y in the less than simple model?

A

change in Y = k (change in G)

64
Q

What is the formula for AE1 in the less than simple model?

A

AE1 = AE + change in G (or I or C?)

65
Q

How do we go from E0 to E1?

A

At E0: AE > Y
= unexpected drop in inventories
- Y increases until Y = AE again at E1

66
Q

What is the formula for the output gap?

A

OG - Y - Yp

67
Q

If Yp = 1700, by how much does G need to change?

A

OG = Y - Yp
OG = 1286 (which was Y*) - 1700
OG = -414
so change in Y = 414

change in Y = k (change in G)
414 = (1/0.28) (change in G)
change in G = (414)(0.28)
change in G = 116

68
Q

What is the taxation multiplier?

A

-b (1/1-z)

-MPC) (k

69
Q

How do we find change in T0?

A 
Y* = 1/1-b(1-t)   (a + I + G - bT0)
/\Y = 1/1-b(1-t)   (/\a + /\I + /\G - b/\T0)
/\Y = 1/1-z  (-/\bT0)
/\Y = (-b) (1/1-z) (/\T0)
/\Y = (-MPC) (k) (/\T0)
414 = (-0.8) (1/0.28) (/\T0)
/\T0 = -145
70
Q

What is the balanced budget multiplier (BBM)?

A

Multiplier for an equal change in G and T0 that leaves the BB unchanged.

71
Q

What is the formula for the BBM?

A

BBM = (MPS) (k) = (1-b) (1/1-z)

72
Q

What is the formula for the change in Y with the BBM?

A 
/\Y = (1/1-z) (/\G -b/\T0)
/\Y = (1/1-z) (/\G -b/\G)
/\Y = (1-b) (1/1-z) (/\G)
/\Y = (MPS) (k) (/\G)
/\Y = (BBM)(/\G)
73
Q

What is the BBM in relation to 1 for the simple model and for all other situations?

A

If we’re in the simple model: z = b so BBM = 1

In all other situations: BBM < 1

74
Q

Are exports (X) autonomous or induced?

A

Autonomous.

75
Q

Are imports (IM) autonomous or induced?

A

Induced.

76
Q

What is the formula for imports (IM)?

A

IM = IM0 + mYd

77
Q

What causes shifts in X, IM, and NX?

A
  1. change in foreign income
    • affect our X
    • U.S GDP up, X up
      GDP down, X down
  2. changes in international relative prices
    if P goes up in Canada, affects X, IM, and NX
    • X becomes more expensive (X down)
    • IM now cheaper (IM up)
      Overall: - X shifts down
      - IM rotates upward
78
Q

What is the formula for Y* in the less than/less than simple model?

A

Y* = [1/(1-b)(1-t)+m] (a + I + G + X -bT0)

79
Q

What is the formula for AE in the simple model?

A

AE = C + I

80
Q

What is the formula for AE in the less than simple model?

A

AE = C + I + G

81
Q

What is the formula for AE in the less than/less than simple model?

A

AE = C + I + G + (X-IM)

82
Q

What is the formula for AE1 in the less than/less than simple model?

A

AE1 = AE + change in X (or C or I or G?)

83
Q

What is the effect of IM and X on k?

A

The higher (lower) is m and t, the lower (higher) is k.

84
Q

What is the injections/leakages approach?

A 
Y = C + s + T  (actual)
Y = AE = C + I + G + (X-IM)  (in equilibrium)
C + s + T = C + I + G + X - IM
s + T + IM = I + G + X
leakages = injections
Only in equilibrium is this true.
85
Q

What is the economy’s influence on the deficit (and natural debt)?

A
  1. Taxes depend on Y.
  2. Some G depends on Y (social assistance, employment insurance, transfer payments).
  3. Automatic stabilizers: government programs designed to be of assistance during economic downturn.
  4. Fiscal drag
    • as Y goes up, T goes up (slows expansion)
    • government lags
  5. Full employment budget
    • budget position if at Yp
    • structural deficit (at Yp with deficit)
    • cyclical deficit (from economic slow down)
86
Q

What is the formula for the less than simple model multiplier?

A

What is the formula for the marginal propensity to spend (z) in the simple model?

87
Q

What is the formula for the marginal propensity to spend (z) in the less than simple model?

A 
z = (1-b) (1-t)
z = MPC (1-t)
88
Q

What is the formula for the marginal propensity to spend (z) in the less than/less than simple model?

A 
z = (1-b) (1-t) + m
z = MPC (1-t) + m
89
Q

What is the formula for the less than simple model multiplier?

A 
k = 1/1-z
k = 1/(1-b)(1-t)
90
Q

What is the formula for the less than/less than simple model multiplier?

A 
k = 1/1-z
k = 1/(1-b)(1-t) + m

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