Aggregate Demand

Question 1

What does consumer spending consist of?

Answer 1

Spending by consumers on NEWLY produced goods and services - no residential housing.

Question 2

What is national income?

Answer 2

before tax income
National income = GDP (DI + Net Taxes)

Question 3

What is disposable income?

Answer 3

after tax income
DI = National income - Net Taxes (Taxes - Transfers)
DI = GDP - Net Taxes

Question 4

Consumption spending is a function of what?

Answer 4

Disposable income DI

Question 5

How does the slope of the consumption function vary with DI?

Answer 5

Positive, less than 1.

Question 6

What is MPC?

Answer 6

Slope of the consumption function - change in C/change in DI

Question 7

What is the range of MPC?

Answer 7

MPC < 1 always

Question 8

Can MPC be >= 1?

Answer 8

No

Question 9

How do tax cuts/transfer payments affect consumption function?

Answer 9

New C = New DI x MPC

Question 10

How do tax cuts/transfer payments affect consumption function curve?

Answer 10

Change DI - Change C - movement ALONG curve

Question 11

What are the factors that shift the consumption function?

Answer 11

wealth, price level, future income expectations

Question 12

expectations of higher income in future lead to more/less consumption spending today?

Answer 12

more

Question 13

increase in stock prices leads to higher/lower consumption spending?

Answer 13

increase in stock prices - wealthier - more consumption spending

Question 14

increase in housing prices leads to higher/lower consumption spending?

Answer 14

increasing in housing prices - house worth more - wealthier - more consumption spending

Question 15

increase in price level leads to higher/lower consumption spending?

Answer 15

higher price level - purchasing power falls - lower consumption spending

Question 16

what does investment spending include?

Answer 16

anything used to produce final goods and services in next year - new physical capital, changes in business inventories; new housing, NO STOCKS

Question 17

which is the most volatile component of AD?

Answer 17

Investment spending

Question 18

Increased interest rates increase/decrease investment spending?

Answer 18

Decrease

Question 19

What factors affect investment spending?

Answer 19

Investor confidence, interest rates, supply of money in economy

Question 20

when there is less money in the economy, investment increases/decreases?

Answer 20

Less money supply - higher cost of borrowing - higher interest rates - less investment

Question 21

when Japan’s GDP rises, how does US net exports change?

Answer 21

increases - higher foreign income - purchase more US goods - more US exports

Question 22

when US GDP increases, how do US net exports change?

Answer 22

falls - US richer - purchase more goods from other countries - more imports - lower net exports

Question 23

what are the factors that cause movement along the AD curve? OR
Why is the AD curve downward sloping?

Answer 23

Changes in wealth (C), interest rate (I), and international trade (Nx) that occur due to changes in PRICE level.

Question 24

what are the factors that SHIFT the AD curve?

Answer 24

changes in C, G, I, Nx other than due to price level

Question 25

which changes to C SHIFT the AD curve?

Answer 25

increased wealth due to higher housing/stock prices, higher expected future incomes

Question 26

which changes to I SHIFT the AD curve?

Answer 26

investor confidence, interest rate changes INDEPENDENT of price level, supply of money in economy

Question 27

what is the spending multiplier?

Answer 27

$1 spending generates more than $1 GDP
total spending generated from $1 = 1/(1 - MPC)

Question 28

What is the spending generated in the first round after $x spending?

Answer 28

MPC x $x

Question 29

What is the total spending generated for $x spending?

Answer 29

(spending multiplier) ms x $x

Question 30

which changes to Nx SHIFT AD curve?

Answer 30

exchange rates between countries, GDP changes between countries

Question 31

US exports (US products consumed in other countries) are counted under what?

Answer 31

X only (since adding, don’t double count)

Question 32

US imports (foreign made goods consumed in the US) are counted under what?

Answer 32

C/I and IM, since subtracting from US consumption

Question 33

a $1 tax cut increases DI by:

Answer 33

$1

Question 34

a movement ALONG the consumption function is a result of:

Answer 34

change in DI

Question 35

when dollar gets less expensive, do imports/exports increase?

Answer 35

imports - $ less expensive - $1 = 150 yen - purchasing power of dollar falls - yen more valuable - buy foreign goods