Test 2: Chapters 21 + 22 Flashcards
1
Q
What is the formula for planned aggregate expenditure (AE)?
A
AE = C + I + G + (x-IM)
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
3
Q
What are autonomous expenditures?
A
Do not depend on national income.
4
Q
What are induced expenditures?
A
Depend systematically on national income.
5
Q
What is the formula for national output?
A
y = c + s
6
Q
What is the formula for savings?
A
s = y - c
7
Q
Define disposable income. What’s the formula?
A
- After tax income
Yd = Y - T
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
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
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.
11
Q
What is the formula for MPC?
A
MPC = change in c / change in Yd (=b)
-b (k)
0 < MPC < 1
12
Q
What is the average propensity to consume (APC)?
A
The proportion of disposable income households want to consume.
13
Q
What is the formula for APC?
A
APC = c/Yd
14
Q
What is the saving function?
A
s = -a + (1-b) Yd
15
Q
What is the marginal propensity to save (MPS)?
A
The fraction of additional disposable income spent on savings.
Slope of saving function.
16
Q
What is the formula for MPS?
A
MPS = change in s / change in Yd (= (1-b) )
MPS = 1-MPC
0 < MPS < 1
17
Q
What is the average propensity to save (APS)?
A
APS = s/Yd
18
Q
What is APC added to APS?
A
APC + APS = 1
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
20
Q
What are other factors affecting consumption and saving?
A
- Wealth (w)
- Interest rate (i)
- Future expectations (exp)
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
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
23
Q
What is desired investment (I)?
A
Spending by firms on…
- inventory changes
- residential construction
- plant and equipment
24
Q
What is the desired investment affected by?
A
- Real interest rate (r)
- Change in sales
- Business confidence
25
What is the real interest rate (r)?
The opportunity cost of borrowing instead of using their (firm) own money.
26
What happens when the real interest rate goes up?
- Cost more to hold inventory
- Affects housing demand
- More expensive to borrow
27
How does the real interest rate affect I?
r up, I down
| r down, I up
28
How does change in sales affect I?
Usually the higher (lower) the level of sales, the larger (smaller) the desired stock of inventory.
sales up, I up
sales down, I down
29
How does business confidence affect I?
When firms expect the economy to be good (bad) in the future, they will increase (decrease) I.
30
If plan for 100K but actual is 90K...
10K unplanned inventory investment.
31
If plan for 100K but actual is 110K...
10K unplanned inventory disinvestment.
32
What form does the AE equation take?
AE = A + zY
33
What is z?
The marginal propensity to consume (out of national income).
| The additional AE as a result of a change in Y.
34
What is the formula for the marginal propensity to spend (z) in the simple model?
```
z = change in AE / change in Y
z = b = MPC
```
35
When does equilibrium (Y*) occur?
When Y = AE
36
What is the formula for the inventory adjestment?
Y - AE
37
What happens when AE > Y?
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
What happens when AE < Y?
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
How do you find Y*?
C = 30 + 0.8Yd
I = 75
T = 0
```
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
How does equilibrium output (Y) change in response to a change in some autonomous variable (say investment)?
By an amount equal to the multiplier.
41
What is the formula for the autonomous expenditure multiplier?
change in Y / change in A
42
What is the formula for the investment multiplier?
change in Y / change in I
43
What is the formula for the simple model multiplier?
k = 1 / 1-z (1/1-b = 1/1-MPC = 1/MPS)
44
What is the formula for Y*?
Y* = 1/1-b (a+I)
45
What is the formula for AE1 in the simple model?
AE1 = AE + change in I (or change in C?)
46
How do you find Y*new?
```
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
What is the formula for the change in Y in the simple model?
change in Y = 1/1-b (change in I)
| change in Y = k (change in I)
48
What is the formula for Y*new?
Y*new = Y* + change in Y
49
What is the size of the multiplier?
The larger (smaller) is z, the steeper (flatter) is the AE equation and the larger (smaller) is k.
50
What are government expenditures (G)?
desired and given as autonomous.
51
What is net total revenue?
Net total revenue = total tax revenue - transfer payments
52
What is the formula for taxes (T)?
T = T0 = tY
T0: autonomous taxation
t: tax rate (if t=0.2, 20% of y is taxed)
53
What is the formula for budget balance (BB)?
BB = T - G
54
What does anything that is autonomous depend on?
Level of income.
55
What does anything that is induced depend on?
Not the level of income.
56
When are we in a surplus?
If BB > 0
57
When are we in a deficit?
If BB < 0
58
When do we have a balanced budget?
If BB = 0
59
What is the formula for AE in the less than simple model?
AE = C + I + G
60
What is the formula for Y* in the less than simple model?
Y* = 1/1-b(1-t) (a + I + G - bT0)
61
What is fiscal policy?
Government's ability to spend and tax.
62
What is the government multiplier?
k = change in Y / change in G
63
What is the formula for the change in Y in the less than simple model?
change in Y = k (change in G)
64
What is the formula for AE1 in the less than simple model?
AE1 = AE + change in G (or I or C?)
65
How do we go from E0 to E1?
At E0: AE > Y
= unexpected drop in inventories
- Y increases until Y = AE again at E1
66
What is the formula for the output gap?
OG - Y - Yp
67
If Yp = 1700, by how much does G need to change?
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
What is the taxation multiplier?
-b (1/1-z)
| -MPC) (k
69
How do we find change in T0?
```
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
What is the balanced budget multiplier (BBM)?
Multiplier for an equal change in G and T0 that leaves the BB unchanged.
71
What is the formula for the BBM?
BBM = (MPS) (k) = (1-b) (1/1-z)
72
What is the formula for the change in Y with the BBM?
```
/\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
What is the BBM in relation to 1 for the simple model and for all other situations?
If we're in the simple model: z = b so BBM = 1
| In all other situations: BBM < 1
74
Are exports (X) autonomous or induced?
Autonomous.
75
Are imports (IM) autonomous or induced?
Induced.
76
What is the formula for imports (IM)?
IM = IM0 + mYd
77
What causes shifts in X, IM, and NX?
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
What is the formula for Y* in the less than/less than simple model?
Y* = [1/(1-b)(1-t)+m] (a + I + G + X -bT0)
79
What is the formula for AE in the simple model?
AE = C + I
80
What is the formula for AE in the less than simple model?
AE = C + I + G
81
What is the formula for AE in the less than/less than simple model?
AE = C + I + G + (X-IM)
82
What is the formula for AE1 in the less than/less than simple model?
AE1 = AE + change in X (or C or I or G?)
83
What is the effect of IM and X on k?
The higher (lower) is m and t, the lower (higher) is k.
84
What is the injections/leakages approach?
```
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
What is the economy's influence on the deficit (and natural debt)?
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
What is the formula for the less than simple model multiplier?
What is the formula for the marginal propensity to spend (z) in the simple model?
87
What is the formula for the marginal propensity to spend (z) in the less than simple model?
```
z = (1-b) (1-t)
z = MPC (1-t)
```
88
What is the formula for the marginal propensity to spend (z) in the less than/less than simple model?
```
z = (1-b) (1-t) + m
z = MPC (1-t) + m
```
89
What is the formula for the less than simple model multiplier?
```
k = 1/1-z
k = 1/(1-b)(1-t)
```
90
What is the formula for the less than/less than simple model multiplier?
```
k = 1/1-z
k = 1/(1-b)(1-t) + m
```
