topic 6 - output and aggregate demand 1

Question 1

GDP is… this measures…

Answer 1

gross domestic product
the output made in
the economy, regardless of who owns the production inputs.

Question 2

GNP is… this measures…

Answer 2

Gross national product
the income of a
country.

Question 3

Value added is…

Answer 3

the increase in the value of goods as a result of
the production process

Question 4

a final good is a…

Answer 4

good purchased by the ultimate/final user (households or firms)

Question 5

an intermediate good is a…

Answer 5

partial finished good that forms inputs to a subsequent production process that then use them up.

Question 6

when doing accounting for the current period how do we treat inventories or stock?

Answer 6

as final goods

Question 7

in the absence of government and foreign sector (closed economy) we assume ______ = __________

where:
i________ is…
s_____ is…

this comes from the fact that in the absence of government and foreign sector GDP = ____ ______ = _____ _______

Answer 7

savings = investment (S=I)

the purchase of new capital goods by firms

the part of the economy not spent on buying goods or services

GDP = total income = final expenditure

Question 8

three ways to measure national output?

explain each.

Answer 8

expenditure, income, output

expenditure:
the sum of expenditures in the economy e.g Y=C+I+G+X-Z (income(y) = consumption(C) + investment(I) + government(G) + exports(X) - imports(Z) )

income:
the sum of incomes paid for factor services (wages,
profits, etc.)

Output:
The sum of output (value added) produced in the
economy

(dont switch between them during calculations, but the results are interchangeable (the same))

Question 9

what is the GNP deflate?

to account for population change what should you use?

Answer 9

an index showing what happens to the price of all goods

GNP per capita
(e.g UK is gaining people but not productivity so GNP is increasing but not GNP per capita)
(not sure if this fact is true)

Question 10

potential output is…

Answer 10

The output the economy would produce if all factors of production were fully employed

Question 11

actual output is…

Answer 11

What is actually produced in a period
(we will focus on when actual is less then potential)

Question 12

given there is no government and no international trade what are the 2 components of aggregate demand?

this can be written in short form as…

Answer 12

consumption and investment
(investment as in planned or desired additions to physical capital & inventory)

AD = C + I
(aggregate demand = consumption + income)

Question 13

to simplify the consumption demand model what do we assume?

Answer 13

that households allocate their income between consumption and saving

Question 14

consumption function facts:
what relationship do consumption and income have?

when income ___________ _ people still _________

do we assume people spend all there income in this scenario?

Answer 14

strong positive correlational

approaches 0, consume

NO (people tend not to consume all there income, consumption is only a fraction of income)

Question 15

consumption function:
the consumption function shows…

the general equation for consumption function is…
where… (state the variables)

draw a rough general graph of a consumption function

Answer 15

desired aggregate consumption at each level of aggregate income

C = A +cY
where:
, C is consumption
, A is autonomous consumption
, little c is the marginal propensity to consume
, Y is income

slide 18 (consumption on y and income on x)

Question 16

saving function:
what is MPS? and is represented as…

the general equation for saving function is…
where… (define variables)

draw a rough graph

Answer 16

marginal propensity to save, represented as (1-c)

S = -A + (1-c)Y
where:
, S is savings
, -A is autonomous consumption
, (1-c) is marginal propensity to save
, Y is income

slide 19

Question 17

consumption and saving function:
all income is either consumed or saved ∴ Y =

Answer 17

Y = C + S

Question 18

investment demand is…

we assume that investment (I) is __________ and
______________ of current output and ______
(this assumption is later relaxed so this one may have to be taken out later)

Answer 18

a firms desired or planned additions to physical capital and inventories

constent, independent, income

Question 19

equilibrium output is…

this can be found on a AD income graph by…

draw the graph

this model is called the…

at this point of equilibrium all ________ in the _________ are ___ _______

Answer 19

when planned demand (AD or desired spending) = actual output/income
(i think the terms aggregate demand, planned demand and desired spending all mean the same thing in this scenario. same with actual output and actual income)

drawing a 45 degree line from the origin until it crosses the AD line. the point of intersection is the equilibrium point.

slide 22

Keynesian cross

resources, economy, fully utilised

Question 20

what are exogenous and endogenous variables?

Answer 20

exogenous variables are external factors on the economy
endogenous variables are variables that originate from within the model (e.g number of people is endogenous to AD model)

Question 21

what is another way to find equilibrium (non AD way)

draw this graph

Answer 21

set planned investment = planned savings

slide 24 savings / investment on the y and output/income on the x. investment is constent horizontal linear and savings is +ve linear

Question 22

what will happen if firms become pessimistic about future demand? show this on an AD income graph.

Answer 22

is firms are pessimistic about future demand they will invest less. as AD = C + I and I is a constent the AD line should be taken vertically downwards to show a decrease in AD with no change in the gradient.
this decrease will then change the equilibrium point between AD and income/output. the new income/output and AD value relating to the new equilibrium point is less
∴ you can say that as firms become more pessimistic about future demand, investment will decrease which will decrease output/income and AD in the economy.
see slide 26

Question 23

assume AD and output are in equilibrium, derive Y = A+I/1-c

what can you use this equation for?

derive S=-A + (1-c) form Y=C+S

Answer 23

as a reult for of teh assumption this topic output= income
∴ Y=AD=C+I=A+cY+I=
∴Y=A+cY+I
Y-cY=A+I
Y(1-c)=A+I
Y=A+I/1-c

to find out what happens to output/income after different exogenous effects

Y=C+S
S=Y-C
S=Y-(A+cY)
S=Y-A-cY
S=-A+y(1-c)
S=-A+(1-c)Y

Question 24

If either ___________ ___________ or ___________
changes, it will affect _______, which will affect ___________,
which will affect _______ _____

this is represented mathematically through the Multiplier… and the equations…

Answer 24

autonomis consumption(A), investment(I), output(/income(Y)), consumption(C), output(/income) again

Multiplier = 1/1-c >1

y=1/1-c * (A+I)
effects
C=A+cY
effects
Y=C+S
(and then feedback loop)

(not sure about this slide)

Question 25

state the equations/identities used in this topic:
AD=
I=
Y=
C=
S=

Answer 25

AD=C+I
I=S
Y=C+S
C=A+cY
S=-A+(1-c)Y

Question 26

A reduced desire to ____ leads to an ________ in
output, with no change in _______ ________.

Answer 26

save, increase, planned savings

(dont really understand this one. comes form slide 29 - need to look at that slide again) (need to look into to paradox of thrift more)