Unit 5

Question 1

What is the equation for the multiplier

Answer 1

1/ 1 - mpc

Question 2

How do you find the marginal propensity to consume

Answer 2

MPC = ^ consumer spending / ^ disposable income

Question 3

What is the marginal propensity to save

Answer 3

MPS = 1 - MPC

Question 4

What does the multiplier assume

Answer 4

Changes in overall spending leads to real aggregate output
the interest rate is given
gov purchases, taxes and transfers are all zero
there is no foreign trade

Question 5

How do you find the GDP

Answer 5

consumer spending + investment spending

Question 6

What is autonomous change in aggregate spending (^AAS)

Answer 6

This is an initial change in desired level of spending by firms, households, or government, at a given level of real GDP

Question 7

What is the multiplier

Answer 7

The multiplier is the ratio of total change in real GDP to the size of that autonomous change

Question 8

What is the consumption function equation

Answer 8

c = a + MPC x yd

Question 9

What is the consumption function (definition)

Answer 9

It is an equation showing how an individual households consumer spending varies with the households current disposable income

Question 10

What is the aggregate consumption function

Answer 10

This is the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending
Same form as consumption function but at an aggregate level

Question 11

What does aggregate mean

Answer 11

It means that you are taking a measure for the whole economy

Question 12

What causes shifts in the aggregate consumption function

Answer 12

changes in expected wealth
changes in aggregate wealth

Question 13

What is planned investment spending

Answer 13

This is investment spending that businesses plan to undertake during a given period

Question 14

What does planned investment spending depend negatively on

Answer 14

the interest rate
existing production capacity

Question 15

What does planned investment spending depend positively on

Answer 15

expected future real GDP

Question 16

What are inventories

Answer 16

They are stocks of goods that are held to satisfy future sales

Question 17

What is inventory investment

Answer 17

It is the value of the change in total inventories held in the economy during a time period
If inventories have reduced then investment inventory is negative

Question 18

What is unplanned inventory investment

Answer 18

Occurs when the actual investment is more or less than businesses expected, leading to unplanned changes to inventory
If the business had an influx of sales and needed more inventory then unplanned inventory investment would be negative

Question 19

What is actual investment spending

Answer 19

this is the sum of planned investment spending and unplanned inventory investment

Question 20

What is planned aggregate spending equation

Answer 20

AEplanned = C + Iplanned

Question 21

What is planned aggregate spending

Answer 21

this is the total amount of planned spending in the economy, which includes consumption spending and planned investment spending

Question 22

What does it mean when real GDP is higher then AEplanned

Answer 22

Negative
If sales are higher than expected, ending inventories will be lower than expected, and unplanned inventory investment will be negative

Question 23

What does it mean when real GDP is less then AEplanned

Answer 23

This is associated with positive unplanned inventory investment
This is when firms have overestimated the number of sales leading to a increase in inventory

Question 24

When planned aggregate spending is less then Y, what is unplanned inventory investment

Answer 24

Negative, there is an unexpected increase in inventories and firms reduce production

Question 25

When planned aggregate spending is larger then Y, what is unplanned inventory investment

Answer 25

positive, ending inventories will be higher than expected, and unplanned inventory investment will be positive.

Question 26

What do shifts in autonomous expenditure lead to

Answer 26

They lead to a change in GDP, the magnitude of this change depends on the multiplier