Week 21 - Spending and Output

Question 1

The Keynesian Model

Answer 1

A macroeconomic theory that emphasizes the role of aggregate demand in determining the overall level of economic activity, especially in the short run.

Question 2

Planned aggregate expenditure (PAE)

Answer 2

Total planned spending on final goods and services.
Made up of:
- Consumption (C) by households
- Planned investment (I) – planned spending by domestic firms on new capital goods.
- Government purchases (G) – federal, state and local governments making purchases.
- Net exports (NX) – total of exports minus imports.
PAE = C+I+G+NX

Question 3

Consumption

Answer 3

Depends on disposable income (after tax income people are able to spend; Y-T).
Makes up 2/3 of total spending.

Question 4

Consumption function

Answer 4

C = C̄ + (mpc) (Y – T)
C̄: autonomous consumption - spending not related to the level of disposable income.
mpc: Marginal propensity to consume - the increase in consumption spending when disposable income increases by $1. 0<mpc<1.
Y: income
T: taxes

Question 5

income-expenditure multiplier (IEM)

Answer 5

The effect of a one-unit increase in autonomous expenditure on short-run equilibrium output.
IEM = 1/ (1-mpc)