Chapter 11

Question 1

list

model assumptions

Answer 1

• produceres are willing to supply additional output at a fixed price
• interest rate is fixed
• no gov spending, no taxes
• closed economy

Question 2

define

Disposable Income

Answer 2

Y - (T - TR)
no gov: y

t - tr is net tax payment

Question 3

what is The Multiplier

Answer 3

1 / (1 - MPC)

Question 4

describe

multiplier effect (chowdhury)

Answer 4

new investment in the economy causes spending > production. Firms will increase their output by the amount demanded. this will be added to the GDP

Y + Δ Y = C + I + Δ I

Question 5

define

multiplier effect (thomas)

Answer 5

if GDP increases by some amount, then GDP is going to rise by more than that amount

Question 6

formula for GDP and disposable income

Answer 6

Δ I + MPC x Δ I + MPC(MPC x ΔI) + MPC (MPC^2 x Δ I)…
or
1/(1 - MPC) x ΔGDP

Question 7

define

Marginal Propensity to Consume

Answer 7

increase in consumer spending when disposablle income increases by one dollar

Question 8

Formula for Marginal Propensity to Consume

Answer 8

Δ consumer spending / Δ disposable income

Question 9

disposable income formula

Answer 9

consumption expenditure + savings

Question 10

define

MPS

Answer 10

proportion of each additional $ saved

Question 11

MPS formula

Answer 11

1 - MPC

Question 12

The greater the savings…

hint: size of MPC

Answer 12

the larger the MPC

Question 13

define

Consumption Function

Answer 13

an estimation of consumer spending

Question 14

define

Consumption Function Formula

Answer 14

C = α + MPC x Yd

Question 15

discuss

Keynesian Cross

Answer 15

• 45 degree line, X = Y
• above the line, Y > X
• below the line, X > Y

Question 16

If Y > X…

keynesian cross

Answer 16

spending > income

Question 17

if X > Y…

keynesian cross

Answer 17

savings > spending

Question 18

define

C

consumption function

Answer 18

consumer spending

Question 19

define

α

consumption spending

Answer 19

autonomous consumer spending

what amount will we always spend, even with 0 income

Question 20

define

MPC

consumption function

Answer 20

marginal propensity to consume
slope
Δc/Δyd

Question 21

define

Yd

consumption function

Answer 21

disposable income

Question 22

how to get aggregate consumption function from individuals?

Answer 22

• add together the intercept value (α)
• average MPC

Question 23

discuss

Income - Expenditure Model

Answer 23

• same assumptions as usual
• used to find AEplanned
• Yd = AEplanned is eqm

Question 24

AEplanned = ?

Answer 24

AEplanned = C + Iplanned

(or when it crosses the 45 degree line)

Question 25

if AE > 45 degree line....

Answer 25

Iunplanned is negative, GDP increases

Question 26

if AE < 45 degree line...

Answer 26

Iunplanned is positive, producers cut production to movve back down to the eqm

Question 27

eqm (help(

Answer 27

GDP = AEplanned + Iunplanned | i unplanned will = 0

Question 28

if GDP > AEplanned...

Answer 28

Iplanned > 0 -> producers will cut/slow production to move back to the eqm

Question 29

if GDP < AEplanned...

Answer 29

Iplanned < 0 -> producers will raise production to move back to the eqm

Question 30

# define Autonomous Change in Aggregate Expenditure

Answer 30

an initial rise or fall in aggregate expenditure at a given lvl of real gdp

Question 31

# list Shifts in Aggregate Consumption Function

Answer 31

changes in expected future disposable income - increase, function shifts up - dec, function shifts down changes in aggregate wealth - increase, function up - decrease, function down

Question 32

# define Planned Investment Spending

Answer 32

investment spending that firms intend to undertake during a given period

Question 33

# list Factors that Impact Investment Spending

Answer 33

1. interest rate 2. expected future lvl of real GDP 3. current lvl of production capacity

Question 34

# discuss Interest rate | investment spending

Answer 34

negatively related - high interest leads to low I

Question 35

# discuss Expected Future Real GDP | investment spending

Answer 35

- higher expected growth: higher lvl of planned investment - lower expected growth: lower planned investment | (known as the accelerator principal)

Question 36

# discuss Inventories | investment spedning

Answer 36

Inventory Investment: value of the change in total inventories held in the economy during a given period Unplanned Inventory Investment: unintended swing in inventories due to sales

Question 37

Actual investment spending =

Answer 37

Iunplanned + Iplanned

Question 38

Y*

Answer 38

income-expenditure equilibrium GDP

Question 39

Change in Y* arising from an autonomous change in expenditure =

Answer 39

(1/1 - MPC) x ΔAE0