Week 3: Short-term economic fluctuations and the Keynesian model

Question 1

Output gap

Answer 1

Measures how far output is from its normal level

Question 2

Potential output (potential GDP)

Answer 2

Amount of output (real GDP) that an economy can produce when using its resources at normal rates.

Question 3

Output gap formula

Answer 3

100[(Y-Y)/Y*]

Question 4

Expansionary gap

Answer 4

Positive output gap where resources are utilized above normal rates.

Question 5

Contractionary gap

Answer 5

Negative output gap where resources are utilized below normal rates.

Question 6

Planned Aggregate Expenditure (PAE)

Answer 6

Total planned spending on final goods and services. PAE = C + G + I^P + NX

Question 7

Marginal Propensity to Consume (MPC)

Answer 7

Amount by which consumption rises when current disposable income rises by one dollar.

Question 8

PAE formula

Answer 8

Cbar - cTbar + I^P + G + X + [c(1-t)-m]Y