Week 4

Question 1

What is actual investment?

Answer 1

Actual Investment = Unplanned Investment + Planned Investment

Question 1

What does individual consumption function show?

Answer 1

How individual household’s consumer spending changes with household’s pre-tax income

Question 2

Define autonomous consumption

Answer 2

amount consumed when individuals have no income

Question 3

what is ‘y’ in ac + mpc (y)

Answer 3

the pre-tax household income

Question 4

What is MPC?

Answer 4

The increase in consumer spending when income rises by $1

MPC = Change in consumer spending/change in disposable income

Question 5

What is Aggregate Consumption Function?

Answer 5

• The aggregate consumption function of evry household in the economy
• shows relationship between aggregate income and aggregate consumption for the whole economy
• its a way to measure GDP/Output

Question 6

4 factors that shift the ACF?

Answer 6

1. Change in interest rates
2. Change in expected future income/ consumer confidence
3. Change in Taxes
4. Change in wealth

Question 7

Paradox f Thrift

Answer 7

Households cut spending in preparation of a recession, but it actually makes every one worse off

Question 8

Consumption Smoothing

Answer 8

• Households try to maintain a steady path for consumption over time;
• borrow/use savings when current income is below permanent income
• save when current income exceeds permanent income

Question 9

Permanent Income Hypothesis

Answer 9

Consumption today is driven by expected future incomes

Question 10

Investment in economics means…

Answer 10

Spending by firms on physical capital (this is the only spending that adds to the economy’s stock)

Question 11

What part of GDP does Aggregate Expenditure include?

Answer 11

Consumption
Investment
Government Purchases
Net Exports

Question 12

What is the Savings Investment Spending Identity?

Answer 12

Savings = Investments are always equal

I = GDP-C-G-X-IM

• a reduction in consumption = increase in savings
• firms investment in physical capital is funded by savings

Question 13

What 3 sources of savings does Investment come from?

Answer 13

1. Household Savings (Household Income - Consumption)
2. Gov. surplus/deficit (Gov. Income - Gov Spending)
3. Foreign Savings (Exports - Imports)

Question 14

Planned Investment Spending

Answer 14

investment spending that firms plan for

depends on
- interest rate
- existing production capacity
- future real GDP

Question 15

Unplanned Inventory

Answer 15

when actual sales are more/less than expected