week 21

Question 1

what is the keynesian model

Answer 1

in the short run firms meet demands at preset prices
firms change prices when marginal benefits exceed marginal costs

Question 2

how has technology reduced menu costs

Answer 2

barcodes/scanners reduce cost of changing prices in stores
pricing online based on consumer data
costs of competitive analysis, informing consumers etc

Question 3

what is planned aggregate expenditure (PAE)

Answer 3

total planned spending on final goods and services
consists of: consumption, investment, gov purchases and net exports

Question 4

how do you calculate PAE

Answer 4

C + I^P + G + NX

Question 5

what are consumption expenditures

Answer 5

account for 2/3 of spending
includes purchases of goods, services and consumer durables
depends on disposable income

Question 6

what is the consumption function

Answer 6

an equation relating planned consumption to its determinants
C = C (with line) + (mpc)(Y-T)

Question 7

what is the wealth effect

Answer 7

tendency of changes in asset prices to affect households wealth and thus their consumption spending

Question 8

what is (Y-T)

Answer 8

disposable income
output + gov transfers - taxes
main determinant of consumption spending

Question 9

what are the two dynamic patterns in the economy

Answer 9

declines in production cause reduced spending
reductions in spending lead to declines in production and income

Question 10

what is autonomous expenditure

Answer 10

part of spending that is independent of output

Question 11

what is induced expenditure

Answer 11

part of spending that depends on output

Question 12

what is short-run equilibrium

Answer 12

level of output at which planned spending = output

Question 13

what were the demand side effects of the covid-19 recession

Answer 13

lockdowns and health fears caused reduced consumption
drop in stock prices reduced wealth and lowered consumption
uncertainty reduced investment

Question 14

what are the supply side effects of covid-19

Answer 14

businesses could not operate
firms cannot respond to decline in inventory investment
fall in PAE led to fall in output
supply restrictions, affect what is produced
GDP plummeting

Question 15

what is the income-expenditure multiplier

Answer 15

shows the effect of one unit increase in autonomous expenditure on short-run equilibrium output
the larger the mpc, the greater the multiplier

Question 16

what are stabilisation policies

Answer 16

gov policies that are used to affect PAE, objective to eliminate output gaps

Question 17

what are expansion policies

Answer 17

increased PAE

Question 18

what are contractionary policies

Answer 18

decreased PAE

Question 19

what is fiscal policy

Answer 19

use changes in gov spending, transfers, taxes

Question 20

what is monetary policy

Answer 20

changes in money supply

Question 21

what are the tools of fiscal policy

Answer 21

gov spending - direct effect on PAE
taxation - indirect effect on PAE
transfer payments - indirect effect on PAE

Question 22

what is discretionary fiscal policy

Answer 22

gov spending - direct effect on PAE
net taxes - indirect effect on PAE
both change gov deficit (G-T)

Question 23

what is the crowding out effect

Answer 23

tendency of an increase in gov expenditure to increase rate of interest and reduce consumption and investment by the private sector

Question 24

what determines the strength of the crowding out effect

Answer 24

responsiveness to consumption and investment to interest rate changes
responsiveness of the demand for money to interest rate changes

Question 25

how do you calculate net taxes

Answer 25

total taxes - transfer payments - gov interest payments

Question 26

what are the supply side effects of fiscal policy

Answer 26

may affect potential output as well as potential spending
investment infrastructure increases Y*
taxes and transfers affect insentives and can change potential output Y*

Question 27

what is gov deficit

Answer 27

difference between gov spending and net taxes
managing impact of deficit limits the govs ability to use fiscal policy as a stimulus

Question 28

what is fiscal policy flexibility

Answer 28

two limits to fiscal policy:
legislative process takes time
competing political objectives

Question 29

what are automatic stabilisers

Answer 29

automatic changes in gov budget deficit which help dampen fluctuations
increase gov spending or decrease taxes when real output declines

Question 30

what is discretionary fiscal policy

Answer 30

decisions by gov to increase or decrease the levels of gov purchases, transfer payments and taxation

Question 31

how do automatic stabilisers effect recessions

Answer 31

incomes, consumption and profits decline
increase in numbers claiming unemployment benefits
net taxes automatically decrease

Question 32

how do automatic stabilisers affect expansions

Answer 32

incomes, consumption and profits increase
decrease in numbers claiming unemployment benefits
net taxes automatically increase in expansions

Question 33

what is the keynesian assumption

Answer 33

producers meet demand at preset prices in the short run
Y = PAE

Question 34

what is the income expenditure multiplier

Answer 34

the effect of a 1-unit increase in autonomous expenditure on short run equilibrium output
1/(1-c)