test 3

Question 1

price level, inflation rate and deflation rate

Answer 1

• price level: average level of all prices in the economy
• inflation rate: rate at which the average price level is rising
• deflation rate: rate at which the average price level is falling

Question 2

two measures of the overall price level and inflation rate

Answer 2

Consumer Price Index (CPI) and GDP Price Deflator

Question 3

what is the consumer price index and its formula

Answer 3

• it measures how much the price of a fixed basket of consumer goods and services changes compared to its price in the base year
• formula: CPIt= Σ PtxQb/Σ PbxQb x 100

Question 4

8 major components to the CPI

Answer 4

1. food
2. shelter
3. household operations
4. clothing and footwear
5. transportation
6. health and personal care
7. recreation (education)
8. alcohol, tobacco, cannabis

Question 5

what is the GDP deflator and its formula

Answer 5

• measures how much the price of a current basket domestically produced goods and services compared to its base year prices
• formula: GDP deft= Σ PtxQt/PbxQt x 100

Question 6

what is the difference between the CPI and the GDP def

Answer 6

• CPI measures price changes of goods and services bought by consumers (domestic and foreign)
• GDP def measures price changes of goods and services produced domestically

Question 7

how to find the inflation rate formula (%)

Answer 7

inflation rate= (CPI later year-CPI earlier year/CPI earlier year) x 100

Question 8

how to convert between purchasing power formula

Answer 8

dollar value B=dollar value A (CPI B/CPI A)

Question 9

what is the Keynesian macroeconomics model

Answer 9

total spending in the economy and its effects on output and inflation

Question 10

what is the consumption expenditure in the Keynesian model

Answer 10

C=a+bYd

Question 11

what is the autonomous investment expenditure in the Keynesian model

Answer 11

I

Question 12

what is the autonomous government purchases in the Keynesian model

Answer 12

G

Question 13

what is the net tax revenues in the Keynesian model

Answer 13

T=tY

Question 14

what is the autonomous exports in the Keynesian model

Answer 14

X

Question 15

what is the planned aggregate expenditure and its formula

Answer 15

• determines the total amount of money that consumers, domestic private investors, government, and foreigners plan to spend on the purchases of goods and services in the economy
• formula: AE= [a+I+G+NX]+[b(1-t)-m]Y

Question 16

what part of the planned aggregate expenditure formula is the total autonomous expenditure

Answer 16

a+I+G+NX

total amount of expenditure that does not depend on GDP

Question 17

what is the consumer expenditure function

Answer 17

total amount of money that consumers want to spend out of their disposable income (Yd)
*disposable income is the total income net of government tax

Question 18

consumption expenditure

C=a+bYd

Answer 18

• a: amount of consumption spending that one will make even if they had no current income (autonomous consumption expenditure)
• b: proportion of an extra dollar of disposable income earned that is spent on consumption (marginal propensity to consume)

Question 19

net tax revenue (T)

T=tY

Answer 19

• total revenue the government receives (its transfer payments)
• t: net tax rate at which the government taxes its citizens

Question 20

imports function

IM=mY

Answer 20

• determines the amount of money a country spends when buying foreign goods
• m: marginal propensity to import

Question 21

what is the imports in the Keynesian model

Answer 21

IM=mY

Question 22

b(1-t)-m

Answer 22

• m: proportion spent on foreign goods
• b(1-t): proportion spent on total consumption (domestic and foreign)
• so b(1-t)-m: proportion spent on domestic goods consumption

Question 23

three cases of budget balance

Answer 23

1. T-G>0 (positive), it is a budget surplus
2. T-G<0 (negative), it is a budget deficit
3. T-G=0, it is a budget balance