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The assumption that firms meet demand for their products at preset prices is the key assumption upon which the basic Keynesian model is built. In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm:
changes production levels to meet the demand
firms do not change prices frequently because it is costly to do so. The costs of changing prices are called ________________________.
Planned aggregate expenditure is total:
planned spending on final goods and services
The four components of planned aggregate expenditure are:
consumption, planned investment, government purchases, and net exports
Planned investment may differ from actual investment because of:
unplanned changes in inventories
If firms sell less than expected, actual investment increases because _____, which is counted as investment.
the unsold goods are added to inventory
If firms sell more output than expected, planned investment:
is greater than actual investment
Planned aggregate expenditure (PAE) equals:
C + ip + G + NX
The largest component of planned aggregate expenditure is[a] which depends on [b].
Consumption, disposable income
When housing prices decrease, household wealth _____, and consumption _____.
The tendency of changes in asset prices to affect spending on consumption goods is called the __________________________________ effect.
The marginal propensity to consume (mpc) is the
amount by which consumption increases when disposable income increases by $1
a) [a] expenditures, the portion that is independent of output and
b) [b]expenditures, the portion that depends on output.
Short-run equilibrium output is the level of output at which actual output:
Equals planned aggregate expenditure
In the Keynesian cross diagram, the ______ line shows the relationship between planned aggregate expenditure and output, and the ______ line represents the condition that planned aggregate expenditure and output are equal.
In the Keynesian cross diagram, the 45-degree line represents the short-run equilibrium condition that
Y = PAE
The effect on short-run equilibrium output of a one-unit increase in autonomous expenditure is called
the income-expenditure multiplier
The income-expenditure multiplier arises because one person's additional spending becomes another person's additional income that will generate additional:
The larger the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output.
If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*) equals 11,000, then autonomous expenditure must ______ to eliminate any output gap.
Increase by 200
policy which refers to decisions about how much the government spends and how much tax it collects. And
policy which determines how much money will circulate in the economy.
One potential problem with using fiscal policy to close recessionary output gaps is that:
sustained government deficits can be harmful to long-run economic growth
Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy affects ______ as well as aggregate demand and fiscal policy is _______.
potential output; not flexible enough
Automatic stabilizers are provisions in the law that imply automatic ______ in government spending or ______ in taxes when real output declines.
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