Expenditure Models

Question 1

Recession

Answer 1

2+ quarters w/ decreased real GDP

Question 2

What assumption is the model making?

Answer 2

Price & Interest rates are fixed in the bid war

Question 3

What is the model of consumption?

Answer 3

C= _c (autonomous consumption) + mpc(Y-t=YD)

Question 4

What is disposable Income?

Answer 4

YD, induced consumption

Question 5

What is autonomous consumption?

Answer 5

Doesn’t depend on Real GDP basically how much we would consume if Real GDP=0

Question 6

What causes the Shifts of the Consumption Function?

Answer 6

Wealth: value & amount of Income you own increased wealth = increased AC

Optimism: Expectations about the future therefore, increased optimism = increased AC

Question 7

Describe a consumption function graph?

Answer 7

Vertical axis: Desired Consumption
Horizontal axis: Real Disposable Income (YD)
45 degree diagonal line where YD=_C
Then a diagonal _c line when the slope is mpc =o.8

Question 8

What are the left and right sides of the consumption function?

Answer 8

The left side is where private savings <0

Right side: private savings >0

Question 9

What is the progression of equations for private savings?

Answer 9

S=YD-C
C=_C+mpcYD

S=YD-_C-mpcYD
S=YD(1-mpc)-_C

Question 10

What is equilibrium in the consumption function?

Answer 10

Yequilibirum: Savings =0

Question 11

When is disposable income just equal to real GDP?

Answer 11

When there is no tax

Question 12

What is disposable income equal to?

Answer 12

YD= _c/(1-mpc)

Question 13

What is the private investment Function?

Answer 13

The desired or planned investment expenditures by all firms

Question 14

What is investment today?

Answer 14

A function showing the current costs and future expected benefits

Question 15

What is important to remember about ALL planned investment??

Answer 15

All planned investment is autonomous: IP=I

Because it doesn’t depend on real GDP but it does depend on future GDP

Question 16

What causes a change in Investment?

Answer 16

Real interest rates: increased Real i = decreased Investment cuz price is higher

Business confidence in future GDP: Increased optimism = increased investment

Question 17

What does the planned Aggregate Expenditure graph look like?

Answer 17

PAE=y axis
Real actual GDP=x axis
Same 45 degree line
_c notch on y axis
Above that _c+_I notch where you draw the diagonal PAE line & signal that the combination of the two notches is PAE
Where PAE coincides w/ 45 degree line is the vertical line of Yeq

Question 18

Describe the graphs of the PAE function?

Answer 18

PAE>Y = left side

PAE

Question 19

What is the equation for PAE?

Answer 19

PAE=Y
PAE=C+I
= _C + CYP + _I
= _C + mpcY + _I

Question 20

What is equilibrium GDP in terms of PAE?

Answer 20

It’s Potential GDP & it’s when Production = Expenditure

Question 21

PQ: If current inventory = 11,000 vehicles
Planned inventory = 12,000
From Jan-March we sell 3,000 more cars than anticipated (Assume 0 changes in production yet)
What is the actual investment?
How should production change?

Answer 21

April 1 inventory: 12k - 3k = 9k
Actual🔺in inventory:
9k-11k = -2k

Unplanned 🔺 in inventory = -3k
we want to increase production