Chapter 6 Flashcards
(12 cards)
stock variable
a variable that is measured at a point in time
ex. wealth
flow variables
variables measured for a period of time
ex. consumption, saving, etc
wealth is held in assets like
a) house
b) deposit
c) stock
d) bonds
e) gold
f) all of the above
all of the above
positive consumer outlook
consumers in general feel optimistic about the economys future
What happens when there is an unplanned decrease in inventories?
a) Actual investment is greater than planned investment.
b) Actual investment is less than planned investment.
c) Actual investment is equal to planned investment.
d) Actual investment can be greater or less than planned investment, depending on the case.
b) actual investment is less than planned investment
- When aggregate expenditure is less than the GDP, businesses will increase inventory levels. When AE is greater than GDP, businesses will sell out of inventory to make up the shortfall. Therefore, an unplanned decrease in inventory tells us that actual investment was lower than planned investment.
An increase in __________ will cause savings to increase.
a) interest rates
b) unemployment
c) the MPC
d) consumption
a) interest rates
- When the interest rate is high, the reward for saving is increased providing households with additional incentive to save.
- For every dollar you earn, you will either use it for consumption or savings. If consumption increases, savings will fall and vice versa.
Higher unemployment rates reduce income which reduces consumption and saving.
When aggregate expenditure is smaller than GDP, inventories will __________ and GDP and total employment will __________.
a) rise; increase
b) fall; decrease
c) fall; increase
d) rise; decrease
d) rise, decrease
-When aggregate expenditure is smaller than GDP, the amount of total spending in the economy is smaller than production. Firms accumulate inventories at first. To save on storage costs, firms reduce production and sell off their extra inventories.
When aggregate expenditures are less than GDP, inventories will:
a) rise
b) not change
c) either rise or fall, depending on the situation
d) fall
a) rise
- GDP measures production and AE measures total spending. Therefore, when total spending is less than production you will see inventories build up.
The value of the multiplier is larger when the value of the:
a) MPC is smaller
b) MPC is larger
c) MPS equals the value of the MPC
d) MPS is larger
b) MPC is larger
A larger MPC means consumers are spending more of each dollar of disposable income which results in a larger multiplier. Mathematically the multiplier is = 1 / (1 – MPC). So, an MPC of .8 will give you a multiplier of 5, while an MPC of .5 will only give you a multiplier of 2.
- If the MPS is larger that means the MPC is smaller since they both sum to one.
An increase in household wealth will:
a) decrease the consumption component of aggregate expenditure
b) decrease the investment component of aggregate expenditure
c) increase the investment component of aggregate expenditure
d) increase the consumption component of aggregate expenditure
d) increase the consumption component of aggregate expenditure
- Household wealth is the value of a household’s assets minus its liabilities (debts). As wealth increases, we are more likely to consume more and as wealth falls we tend to consume less.
Household wealth does not impact government purchases or business investment.
Macroeconomic equilibrium occurs where:
a) aggregate expenditure is higher than total production or GDP
b) aggregate expenditure equals total production or GDP
c) total production, or GDP, is higher than aggregate expenditure
d) total production, or GDP, equals total planned investment
b) aggregate expenditure equals total production or GDP
- Just as is the case in any market, equilibrium occurs where the supply is equal to demand, or in this case spending is equal to income (GDP).
The unemployment rate can never be zero simply due to frictional unemployment due to job switching. Investment is just one component of GDP.
