GDP

Question 2

What is Aggregate Expenditure (AE)?

Answer 2

The sum of expenditures on all final goods and services at a given price level

Aggregate Demand (AD) = Aggregate Expenditure (AE) = Real GDP = Y

Question 3

What is the formula for Aggregate Expenditure (AE)?

Answer 3

AE = C + I + G + (X – M)

Where C = Consumption, I = Investment, G = Government spending, X = Exports, M = Imports

Question 4

What does Consumption (C) refer to in the context of Aggregate Expenditure?

Answer 4

Spending by households on goods and services

Question 5

What is Planned Investment (I)?

Answer 5

Planned spending by firms on capital goods and by households on new homes

Question 6

Define Government Spending (G).

Answer 6

Spending by government on goods and services

Question 7

What are Net Exports (X-M)?

Answer 7

Spending by foreign firms and households on locally produced goods and services minus spending by locals on goods and services produced in other countries

Question 8

How does Disposable Income affect consumption expenditure?

Answer 8

Consumption spending changes when disposable income changes, indicated by the marginal propensity to consume (MPC)

Question 9

What is Disposable Income (Y)?

Answer 9

Income earned by households after deducting taxes and adding transfers

Question 10

What is the Consumption Function (C)?

Answer 10

C = a + mpc (Y)

Where ‘a’ is autonomous consumption and mpc is the marginal propensity to consume

Question 11

What does the slope of the Consumption Function represent?

Answer 11

The marginal propensity to consume (MPC)

Question 12

What is Autonomous Consumption (a)?

Answer 12

Consumption that is independent of disposable income

Question 13

What is Non-Autonomous (Induced) Consumption?

Answer 13

Consumption that changes with disposable income

Question 14

What does the Consumption Function Diagram illustrate?

Answer 14

It shows that the higher the income level, the higher one’s consumption expenditure

Question 15

If a consumer’s autonomous consumption is $100 and their MPC is 0.6, what is the Consumption Function?

Answer 15

C = 100 + 0.6(Y)

Question 16

What are the components of Aggregate Expenditure that are assumed to be autonomous of national income?

Answer 16

• Investment (I)
• Government Expenditure (G)
• Net Exports (X – M)

Question 17

What does the Keynesian Cross diagram depict?

Answer 17

It shows the relationship between quantity produced and quantity sold at equilibrium

Question 18

When does macroeconomic equilibrium occur?

Answer 18

When Aggregate Expenditure (AE) equals total production, or real GDP

Question 19

What happens if AE is greater than real GDP (AE > Y)?

Answer 19

• Unplanned decrease in inventories
• Increasing production leading to an increase in real GDP

Question 20

What happens if AE is less than real GDP (AE < Y)?

Answer 20

• Unplanned increase in inventories
• Decreasing production leading to a decrease in real GDP

Question 21

What are Injections in the context of the circular flow?

Answer 21

• Investment
• Government Expenditure
• Exports

Question 22

What are Leakages in the context of the circular flow?

Answer 22

• Savings
• Taxes
• Imports

Question 23

What is the Marginal Propensity to Consume (MPC)?

Answer 23

The additional amount of consumption that results from a $1 increase in income

Question 24

What is the Marginal Propensity to Save (MPS)?

Answer 24

The increase in savings that results from a dollar increase in income

Question 25

What is the relationship between MPC and MPS?

Answer 25

MPC + MPS = 1

Question 26

What is the Marginal Propensity to Import (MPM)?

Answer 26

The tendency to purchase foreign goods and services as income increases

Question 27

What is the basic idea of the Multiplier?

Answer 27

An increase in investment increases aggregate expenditure and real GDP, leading to a larger increase in income

Question 28

What is the formula for the multiplier in a closed economy?

Answer 28

K = 1 / MPS or K = 1 / (1 - MPC)

Question 29

What is the formula for the multiplier in an open economy?

Answer 29

K = 1 / (MPS + MPM) or K = 1 / (1 - MPC + MPM)

Question 30

How does an increase in autonomous spending affect GDP?

Answer 30

It leads to a larger increase in income