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chapters 10 & 11 Mr. Eipper

Define Aggregate

A collection of specific economic units treated as if they were one

Define Consumption

All expenditures by households on durable consumer goods, non-durable consumer goods, and expenditures for services

Define Savings

The accumulation of funds that results when people in an economy spend less than their incomes during a given time period

Define Disposable Income (DI)

Personal income- personal taxes; income available for personal consumption expenditures and personal saving

Define "the 45 degree line"

It is a reference line

Define Propensity

An inclination or natural tendency to behave in a particular way

Define Nominal Interest Rate

The interest rate expressed in terms of annual amounts currently charged for interest and NOT adjusted for inflation

Define Real Interest Rate

The interest rate expressed in dollars of constant value (adjusted for inflation)

How to find Real Interest Rate

Nominal Interest Rate - Expected Rate of Inflation

Define Expected Rate of Return

The increase in profit a firm anticipates it will obtain by purchasing capital; expressed as a % of total cost investment

Define Investment Demand (ID) Curve

A curve that shows the amounts firms plan to invest at various possible values of real GDP

Define Keynesian Cross Model

It is the Aggregate Expenditures model; does not take inflation into account

Define Planned Investment

The amount that firms plan or intend to invest

Define Unplanned Changes in Inventories

Changes in inventories that occur because of unexpected increases or decreases of aggregate spending

Define Actual Investment

The amount that firms invest

How do you find Actual Investment

Planned investment + unplanned investment

Define Leakage

A withdrawl of potential spending from the income-expenditures stream via saving, tax payments

Define Injection

An addition of spending to the income-expenditure stream: Ig, G, Nx

Define Recessionary Expenditure Gap

The amount by which the aggregate expenditures schedule must shift upward to increase the real GDP to its full-employment, noninflationary level.

What does Inflationary Expenditure Gap mean?

The amount by which the aggregate expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary level.

Define the Economic word/phrase "Full Employment GDP Level".

The use of all available resources to produce want-satisfying goods and services.

When the unemployment rate is equal to the full unemployment rate the situation is called?

Full Employment GDP Level.

What are the 3 phases of economic models?

Closed private economy, open private economy, open mixed economy.

What is a closed private economy?

An economy that has closed international training, and no government spending.

What formula is used for a closed private economy?

GDP = Ca + Ig

What is a open private economy?

An economy that has open international trading.

What formula is used for a open private economy?

GDP = Ca + Ig + Xn

What is a open mixed economy?

An economy that has open international trading and government spending.

What formula is used for an open private economy?

GDP = Ca + Ig + G + Xn

What formula is used to find Average Propensity to Consume?

APC = Consumption / Income

What formula is used to find Average Proensity to Save?

APS = Saving / Income

What formula is used to find Marginal Propensity to Consume?

MPC = Δ Consumption / Δ Income

What formula is used to find Marginal Propensity to Save?

MPS = Δ Savings / Δ Income

What formula is used to calculate wealth?

Wealth = Assests - Liabilities

What formula is used to calculate the multiplier?

1 / MPS or 1 / (1 - MPC)

The most important determinate of consumption and savings is the?

Level of income.

With an MPS of .6 the MPC will be?

.4

MPC can be defined as:

The change in income that is spent.

The 45° line on a graph relating consumption and income shows:

All the points at which consumption and income are equal.

The consumption schedule directly relates:

Consumption to the level of disposable income.

APC + APS will always equal what number?

1

In contrast to investment, consumption is:

Relatively stable.

If Bob's MPC is .60, that means that he will:

Spend 6/10's of any increase in his disposable income.

If MPC is .3, what is the MPS?

.7

The greater the MPC, the:

Smaller the MPS.

In the late 1990's the U.S. stock market boomed, causing U.S. consumption to rise. This is an example of what kind of effect?

Wealth effect.

When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:

Both the consumption and saving schedules downward.

Other things equal, a decrease in the real interest rate will:

Move the economy downward along its existing investment demand curve.

Assume a machine which has a useful life of only 1 year costs $2,500. Assume also that the additional revenue from the output of this machine is expected to be $3,650. What is the expected rate of return?

46%

The relationship between the real interest rate and investment is shown by the:

Investment demand schedule.

A decline in the real interest rate will:

Increase the amount of investment spending.

The investment demand curve suggests:

There is an inverse relationship between the real rate of interest and the level of investment spending.

Other things equal, a 10% decrease in corporate income taxes will:

Shift the investment-demand curve to the right.

Other things equal, a 25% increase in corporate income taxes will:

Shift the investment-demand curve to the left.

The investment demand curve will shift to the right as the result of:

Businesses becoming more optimistic about future business conditions.

If the real interest rate in the economy is " i " and the expected rate of return form additional investment is " r ", then more investment will be forthcoming when:

" r " is greater than " i ".

A high rate of inflation is likely to cause a:

High nominal interest rate.

The multiplier is useful in determining the:

Change in GDP resulting from a change in spending.

The multiplier is defined as:

the change in GDP / initial change in spending.

The practical significance of the multiplier is that it:

Magnifies initial changes in spending into larger changes in GDP.

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?

The Great Depression.

The aggregate expenditures model is built upon which assumption?

Prices are fixed.

In the U.S. from 1929 to 1933, what was the real GDP and the unemployment rate?

real GDP declined 27%, unemployment rose 25%

All else equal, a large decline in the real interest rate will shift the :

Investment schedule upward.

The level of aggregate expenditures in the private closed economy is determined by the:

Expenditures of consumers and businesses.

In a private closed economy, when aggregate expenditures equal GDP:

Planned investment equals saving.

In a private closed economy, when aggregate expenditures exceed GDP:

Business inventories will fall.

If an unintended increase in business inventories occurs:

We can expect businesses to lower the level of production.

If unintended increases in business inventories occur, we can expect:

A decline in GDP and rising unemployment.

At equilibrium real GDP in a private closed economy:

Aggregate expenditures and real GDP are equal.

If the equilibrium level of GDP in a private open economy is $1000 billion and consumption is $700 billion at that level of GDP, then:

Ig and Xn must equal $300 billion.

Suppose income is $2000, and consumption is $1950 in year 1. In year 2 income rises to $3000 and consumption $2700. What is the MPS?

.25

Suppose income is $2000, and consumption is $1950 in year 1. In year 2 income rises to $3000 and consumption $2700. What is the multiplier?

4

If MPC = .5, current GDP = 6Trill 900 Bil, and Ig decreases 70Bil, What is the MPS?

.5

If MPC = .5, current GDP = 6Trill 900 Bil, and Ig decreases 70Bil, what is the multiplier?

2

If MPC = .5, current GDP = 6Trill 900 Bil, and Ig decreases 70Bil, what is the additional investment component?

-140 Billion

If MPC = .5, current GDP = 6Trill 900 Bil, and Ig decreases 70Bil, what is the new level of GDP/Output?

6Trill 760 Bill

If MPC = .8,
AE = $500 Bill, C = $200 Bill, Ig = $100 Bill, and Nx = $50 Bill

What is the MPS?

.2

If MPC = .8,
AE = $500 Bill, C = $200 Bill, Ig = $100 Bill, and Nx = $50 Bill

What is the multiplier?

5

What is Aggregate Demand?

A schedule or curve that shows the amounts of real output that buyers collectively desire to purchase at each possible price level.

What is Aggregate Supply?

A schedule or curve showing the relationship between the price level and the amount of real domestic output that firms in the economy produce.

What are 3 important features of the Aggregate Demand - Aggregate Supply model?

Inflation, recession, unemployment.

What are the 4 sub-categories of consumer spending?

Consumer wealth, expects, household borrowing, taxes.

What are the 2 sub-categories of investment spending?

Interest rates, expected returns.

What are the 2 sub-categories in net export spending?

National Income abroad and money exchange rates.

What are the determinants of Aggregate Demand?

Consumer spending, investment spending, government spending, net export spending.

What are the 2 sub-categories of input/resource prices?

Domestic resource prices and prices of imported resources.

What are the 2 sub-categories of legal-institutional environment?

Business taxes and subsidies and government regulation.

What are the 3 time Horizons involved with Aggregate Supply?

Immediate short run, short run, and long run.

What are the 3 determinants of Aggregate Supply?

Input/Resource prices, Productivity, Legal-Institutional, and Environment.

How do you calculate productivity?

Total output / total inputs

How do you calculate per-unit production cost?

Total input cost / total inputs

Increases in Aggregate Demand causes:

Demand-pull inflation.

Decreases in Aggregate Demand causes:

Recession and cyclical unemployment.

Decreases in Aggregate Supply causes:

Cost-push inflation.

Increases in Aggregate Supply causes:

Full-employment with price-level stability.

The determinants of aggregate demand explain?

Shifts in the aggregate demand curve.

Other things equal, if the national incomes of the major trading partners of the U.S. were to rise, the U.S.'s:

Aggregate demand curve would shift to the right.

If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift:

Leftward by $40 billion at each price level.

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of what effect?

Multiplier effect

In an effort avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to:

Increase aggregate demand.

What percentage of this average U.S. firm's costs are accounted for by wages and salaries?

75%

The aggregate supply curve shows:

Various amounts of real output that businesses will produce at each price level.

The aggregate supply curve (short-run) slopes:

Upward and to the right.

The aggregate supply curve (short-run) is up sloping because:

wages and other resource prices match changes in the price level.

Other things equal, and improvement in productivity will shift:

The aggregate supply curve to the right.

Other things equal, if the U.S. dollar were to depreciate the:

Aggregate demand curve would shift to the left.

What would increase the per unit production cost and shift the aggregate supply curve to the left?

An increase in the price of imported resources.

The determinants of aggregate supply explain:

Three distinct ranges of the aggregate supply curve.

Productivity measures:

Real output per unit of input.

Other things equal, a reduction impersonal and business taxes can be expected to:

Increase both aggregate demand and aggregate supply.

Graphically, cost-push inflation is shows as a:

Rightward shift of the AS curve.

Graphically, the full-employment, low-inflation, rapid-growth eceonomy of the last half of the 1990's is depicted by a:

Leftward shift of the aggregate demand curve and a leftward shift of the aggregate supply curve.

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