Midterm Exam - Chapter 19 & 20 Flashcards
(15 cards)
What does the 45-degree line show?
Represents all points where the consumption is equal to disposable income.
How large and what is included in consumption spending?
Consumption spending represents 68% of GDP. It includes spending by individuals and households on durable goods (autos, appliances, and electronic equipment) and nondurable goods (food, clothing, and entertainment).
In the Keynesian model, what determines savings?
Income
What is the marginal propensity to consume?
The change in consumption associated with a given change income MPC=(∆C÷∆Y).
What determines business investment spending?
Rate of return, the level of technology, and business expectations about the economy
What is the multiplier effect?
Spending changes alter equilibrium income by the spending change times the multiplier. One person’s spending becomes another person’s income and that second person’s spends some (the MPC) which becomes income for the another person and so on until income has changed by 1/(1-MPC) = 1/MPS
What happened in 2008?
Paradox Thrift- When household intent (or desire) to save more, they will reduce consumption, thereby reducing income and output.
What is included in Aggregate Demand?
The output of goods and services (real GDP) demanded at different price levels.
How does a fall in interest rates effect Aggregate Demand?
Business investment increases thus a rise in quantity demanded for real GDP.
How does a fall or rise in the price of the dollar effect Aggregate Demand?
When the price of a dollar rises, Aggregate Demand decreases (American goods become expensive). When the dollar depreciates, AG increases (American goods become cheaper).
What impacts investment spending?
Investment spending is determined mainly but interest rates and the expected return on capital projects.
How does the foreign sector impact AD?
When the national income of a foreign country rises, some of this money is used to buy more American goods and services. This results in increased exports and increase Aggregate Demand.
What shifts the AD curve?
1) . Consumer Spending
2) . Business Investment
3) . Government Spending
4) . Net Exports
What shifts the AS curve?
1) . Input Prices
2) . Productivity
3) . Taxes and Regulation
4) . Market Power of Firms
5) . Inflationary Expectations
What happens when AD shifts right of L/R Aggregate Supply?
Demand-Pull Inflation which results when aggregate demand expands so much that equilibrium output exceeds full employment output and the price level rises
