chapter 11 - expenditure multipliers

Question 1

inflationary output gap

Answer 1

real GDP exceeds potential GDP

Question 2

recessionary output gap

Answer 2

potential GDP exceeds real GDP

Question 3

keynesian model

Answer 3

describes the economy in the very short run when prices are fixed. because each firm’s price is fixed, for the economy as a whole: the price level is fixed, and aggregate demand determines real GDP

Question 4

which components of aggregate expenditure (Y = C + I + G + X - M) are influenced by real GDP

Answer 4

consumption and imports

Question 5

in increase in real GDP does what to aggregate expenditure (and vice versa)

Answer 5

increases

Question 6

what factor is consumption expenditure most directly influenced by?

Answer 6

disposable income

Question 7

disposable income formula

Answer 7

YD = Y - T
(disposable income = aggregate income/real GDP - net taxes)

Question 8

consumption function

Answer 8

the relationship between consumption expenditure and disposable income

Question 9

saving function

Answer 9

the relationship between saving and disposable income

Question 10

when consumption expenditure exceeds disposable income, saving is ___

Answer 10

negative (dissaving)

Question 11

When consumption expenditure is less than disposable income, there is ___

Answer 11

saving

Question 12

autonomous consumption

Answer 12

consumption expenditure is positive even though disposable income is zero.

Question 13

induced consumption

Answer 13

consumption expenditure in excess of autonomous consumption expenditure is induced by an increase in disposable income

Question 14

other factors that influence consumption and saving (and how)

Answer 14

1. real interest rate
2. wealth
3. expected future income
   how: shifts both the consumption function and the saving function

Question 15

marginal propensity to consume (MPC) definition

Answer 15

fraction of a change in disposable income spent on consumption

Question 16

marginal propensity to consume (MPC) formula

Answer 16

MPC = change in C / change in YD
(change in consumption / change in disposable income)

Question 17

the MPC is the ___ of the consumption function

Answer 17

slope

Question 18

marginal propensity to save (MPS) definition

Answer 18

the fraction of a change in disposable income that is saved

Question 19

marginal propensity to save (MPS) formula

Answer 19

MPS = change in S / change in YD
(saving / disposable income)

Question 20

formula/relationship between MPC and MPS

Answer 20

MPC + MPS = 1

Question 21

disposable income changes when…

Answer 21

either real GDP changes or net taxes change

Question 22

marginal propensity to import

Answer 22

the fraction of an increase in real GDP spent on imports

Question 23

aggregate planned expenditure

Answer 23

planned consumption expenditure plus planned investment plus planned government expenditure plus planned exports minus planned imports.

Question 24

aggregate expenditure schedule

Answer 24

relationship between aggregate planned expenditure and real GDP. lists the quantity of aggregate expenditure planned at each quantity of real GDP

Question 25

induced expenditure

Answer 25

consumption expenditure minus imports

Question 26

autonomous expenditure

Answer 26

the sum of investment, government expenditure, and exports, which does not vary with GDP

Question 27

equilibrium expenditure

Answer 27

level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP

Question 28

multipler

Answer 28

the amount by which a change in autonomous expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP.

Question 29

why is the multiplier greater than 1?

Answer 29

An increase in autonomous expenditure induces further increases in aggregate expenditure

Question 30

the size of the multiplier

Answer 30

The size of the multiplier equals the change in equilibrium expenditure divided by the change in autonomous expenditure

Question 31

multipler formula

Answer 31

multiplier = 1 / (1 - slope of AE curve) multiplier = change in Y (real GDP) / change in A (autonomous expenditure)

Question 32

what do imports and income taxes do to the multiplier?

Answer 32

reduce the size

Question 33

aggregate expenditure curve

Answer 33

relationship between aggregate planned expenditure and real GDP

Question 34

aggregate demand curve

Answer 34

relationship between the quantity of real GDP demanded and the price level