Macroeconomics Exam 2

immediate-short-run

-input prices are fixed -output prices are fixed (horizontal curve, right now/today)

long run

-input prices vary -output prices vary

Background and Assumptions of Aggregate Expenditures Model

-originated in 1936 by John Maynard Keynes -explain why Great Depression had happened and how it can end -assumes prices are sticky

Equilibrium GDP

-savings = planned investment -savings is leakage of spending -investment in an injection of spending -no unplanned changes in inventories

The most important determinant of consumption and saving is the: A. level of bank credit. B. level of income. C. interest rate. D. price level.

B. level of income.

APS =

saving/income

short run

-input prices are fixed -output prices vary (upward sloping)

Change in aggregate demand VS. change in quantity In real GDP demanded

- Shift of the curve - Change in quantity in real GDP demanded represents a movement along the curve - Price level is the only factor

Non-Income Determinants of Consumption

-Wealth (effect) -Borrowing -Expectations -Real Interest Rates

Investment Demand Curve Determinants

-acquisition, maintenance, and operating costs -business taxes -technology changes -stock of capital goods on hand -planned inventory changes -expectations

determinant of aggregate supply

-change in input prices -change in productivity (total output/total inputs) -changes in legal-institutional environments

determinant of aggregate demand

-consumer wealth -consumer expectations -household borrowing -personal taxs

Shift factors affecting determinants of aggregate demand

1. Consumer spending 2. Government spending 3. Net exports spending (Shifts to the left) 4. Investment Spending (Real interest rates in expected returns)

Consumption Schedule

A table of numbers showing the amounts households plan to spend for consumer goods at different levels of disposable income.

Savings Schedule

A table of numbers that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income.

In a private closed economy, _________ investment is equal to saving at all levels of GDP and equilibrium occurs only at that level of GDP where _________ investment is equal to saving. A. planned; actual B. actual; planned C. gross; net D. net; gross

B. actual; planned

The aggregate-expenditures model is built upon which of the following assumptions? A. Prices are fixed. B. The economy is at full employment. C. Prices are fully flexible. D. Government spending policy has no ability to affect the level of output.

A. Prices are fixed.

The reason the long-run aggregate supply curve is vertical is A. when both input prices and output prices are flexible, profit levels always adjust to give firms exactly the right profit incentive to produce the full-employment output level. B. when input prices and output prices are fixed, output levels adjust to ensure profit always equals zero. C. that the total amount of output supplied in the economy depends directly on the volume of spending that results at a constant price level. D. none of the above.

A. when both input prices and output prices are flexible, profit levels always adjust to give firms exactly the right profit incentive to produce the full-employment output level.

John Maynard Keynes created the aggregate-expenditures model based primarily on what historical event? A. Bank panic of 1907 B. Great Depression C. spectacular economic growth during World War 2 D. economic expansion of the 1920s

B. Great Depression

One can determine the amount of any level of total income that is consumed by A. multiplying total income by the slope of the consumption schedule. B. multiplying total income by the APC. C. subtracting the MPS from total income. D. multiplying total income by the MPC.

B. multiplying total income by the APC.

Dissaving means: A. the same thing as disinvesting. B. that households are spending more than their current incomes. C. that saving and investment are equal. D. that disposable income is less than zero.

B. that households are spending more than their current incomes.

Equilibrium GDP Equation

C + Ig = GDP

Other things equal, an improvement in productivity will: A. increase the equilibrium price level. B. shift the aggregate supply curve to the left. C. shift the aggregate supply curve to the right. D. shift the aggregate demand curve to the left.

C. shift the aggregate supply curve to the right.

Changes in Aggregate Supply

Changes in the total amount of goods and services produced throughout the economy

The aggregate-demand curve: A. is upsloping because a higher price level is necessary to make production profitable as production costs rise. B. is downward-sloping because production costs decline as real output increases. C. shows the amount of expenditures required to induce the production of each possible level of real output. D. shows the amount of real output that will be purchased at each possible price level.

D. shows the amount of real output that will be purchased at each possible price level.

Aggregate demand curve is

Downward sloping, Real balance effect (purchasing power), interest rate effect, And foreign purchase effect (net exports)

Who are the buyers?

Households, businesses and government

Aggregate Supply

a schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce

Aggregate Demand

a schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level. (downward sloping)

MPC =

change in consumption/change in income

MPS =

change in saving/change in income

APC =

consumption/income

Changes in Aggregate Demand

could be caused by changes in the spending decisions of the households, businesses, the government, and foreigners

Net Exports

exports - imports

Exports create?

production, employment, and income