Macro Ch 12

If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope of the consumption function is

.80

If disposable income increases by $100 million, and consumption increases by $90 million, then the marginal propensity to consume is

.9

Planned aggregate expenditure is equal to

consumption spending plus planned investment spending plus government purchases plus net exports

True/false- when aggregate expenditure is more than GDP firms spent less on capital goods than they planned

false

True/false- when aggregate expenditure is more than GDP households bought fewer new homes than they planned

false

true/false- one of the four main categories of spending identified by John Maynard Keynes is taxes

false

true/false- the multiplier effect does not occur when autonomous expenditure decreases

false

true/false- the multiplier is a value between zero and one

false

true/false- the smaller the MPC, the larger the multiplier

false

In a small economy in 2011, aggregate expenditure was $800 million while GDP that year was $850 million. the following can explain the difference between aggregate expenditure and GDP that year?

firm investments in inventories was greater than anticipated in 2011

If planned aggregate expenditure is less than total production

firms will experience an unplanned increase in inventories

Consumer spending ___ and investment spending ____

follows a smooth trend; is more volatile and subject to fluctuations

Inventories refer to

goods that have never been produced but not yet sold

Increasing house prices

have no independent effect on consumption

____ is defined as the value of a households assists minus the value of its liabilities

household wealth

MPC + MPS=

1

A general formula for the multiplier is

1/MPS

If economists forecast a decrease in aggregate expenditure, how will the economy reach macroeconomic equilibrium?

inventories will rise, and GDP and employment will decline

54) Consumption spending is $16 million, planned investment spending is $4 million, unplanned investment spending is $2 million, government purchases are $6 million, and net export spending is $1 million. What is aggregate expenditure?

$27 million

Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is GDP?

$27 million

Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. the following is not true?

- aggregate expenditure is greater than GDP - there was an unplanned change in inventories - is very volatile and subject to fluctuations; follows a smooth trend

Actual investment spending includes

- change in inventories - spending on new capital equipment - spending on new houses

Does not increase real GDP

- decrease in government spending - households have increasingly pessimistic expectations about future income - decrease in the inflation rate in other countries, relative to the inflation in the US

What does not raise consumer expenditures?

- decrease in price level - decrease in the value of the dollar - decrease in interest rates

Components of aggregate expenditure?

- government spending - consumption spending - net export spending

What does not cause a direct increase in consumption spending

- increase in planned investment - decrease in next export spending - increase in government spending

If firms sell exactly what they expected to sell then

- inventories will not change, and GDP and employment will remain stable - aggregate expenditure will be equal to GDP - there is no unplanned change in inventories

If national income increases by $20 million and consumption increases by $5 million, the marginal propensity is consume is

.25

Household spending on goods and services is known as

consumption spending

The formula for aggregate expenditure is

AE= C+I+G+NX

If firms find that consumers are purchasing more than expected, then?

Aggregate expenditure will likely be greater than GDP

If planned aggregate expenditure is less than total production,

GDP will decrease

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?

There was an unplanned increase in inventories equal to $2 million

___ consumption is consumption that does not depend upon the level of GDP

autonomous

In the aggregate model, ___ has both an autonomous component and an induced component

consumption spending

Not a component of aggregate expenditure?

actual investment spending

If inventories decline by more than analysts predict they will decline, this implies that

actual investment spending was less than planned investment spending

An unplanned increase in inventories results from

actual investment that is greater than planned investment

As a result of slow economic growth in 2011, many companies including Cisco Systems, Lockheed Martin, and Cracker Barrel Old Country Store cut production and employment as a result of the sluggish growth in the total amount of spending in the economy. The total amount of spending in the economy is known as

aggregate expenditure

Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. the following is true?

aggregate expenditure is equal to GDP

Firms in a small economy planned that inventories would grow over the past year by $500,000. Over that year, inventories did grow by exactly $500,000. This implies that

aggregate expenditure that year was equal to GDP that year

Firms in a small economy planned that inventories would grow over the past year by $300,000. Over that year, inventories actually grew by $400,000. This implies that

aggregate expenditure that year was less than GDP that year

If firms sell exactly what they expected to sell, what won't occur

aggregate expenditure will be greater than GDP

A decrease in consumer confidence can put your job at risk if

aggregate expenditures fall

A stock market boom which causes stock prices to rise should cause

an increase in consumption spending

What causes a direct increase in consumption spending

an increase in disposable income

What raises consumer expenditures?

an increase in expected future income

Investment spending will increase when

business cash flow increases

Concerned that its dependence on sales of microprocessors to computer firms would make it vulnerable to sharp sales declines during the recession of 2007-2009, Intel began to develop memory chips that could be used in portable consumer electronic devices such as cell phones. One reason that Intel chose to branch out from producing microprocessors for computers is that

computers are durable goods and spending on computers follows the business cycle

The multiplier is calculated as the

change in real GDP/ change in autonomous expenditure

National income=

consumption+saving+taxes

Investment spending ____ during a recession, and _____ during an expansion

declines; increases

A decrease in Social Security payments will

decrease consumption spending

Increases real GDP

decrease in interest rates

The passage of the Smoot-Hawley Tariff in 1930 sparker a trade war that caused net exports to ___ and real GDP to ___

decrease; decrease

____ in taxes will decrease consumption spending, and ____ in transfer will increase consumption spending

decrease; increase

The five most important variables that determine the level of consumption are

disposable income, wealth, expected future income, price level, and interest rate

Ratio of the increase in ____ to increase in ____ is called the multiplier

equilibrium real GDP; autonomous expenditure

During a(n) ____ many firms experience increased profits, which increases ____ and investment spending

expansion; cash flow

True/false- the multiplier makes the economy less sensitive to changes in autonomous expenditure

false

If the economy is currently in equilibrium at a level of GDP that is below potential GDP, what would move the economy back to potential GDP

increase in wealth

How does a decrease in government spending affect the aggregate expenditure line

it shifts the aggregate expenditure line downward

When aggregate expenditure=GDP,

macroeconomic equilibrium occurs

An increase in the real interest rate will

most likely lower consumers purchases of durable goods

Disposable income is

national income + transfers + taxes

When we graph consumption as a function of ________ rather than as a function of disposable income, the slope of this consumption function is ________.

national income; the MPC

____ usually increase(s) when the US economy is in recession and decrease(s) when the US economy is expanding

net exports

If inflation in the US is higher than inflation in other countries, what will be the effect on net exports for the US

net exports will decrease as US exports decrease

On the 4 degree line diagram, for points that lie below the 45 degree line

planned aggregate expenditure is less than GDP

Assume that inventories declined by more than analysts predicted. This implies that

planned aggregate expenditure was greater than real GDP

Decreases in the price level will

raise consumption because real wealth increases

On the 45 degree line diagram, the 45 degree line shows points where

real aggregate expenditure equals real GDP

_____ describes the relationship between consumption spending and disposable income

the consumption function

The aggregate expenditure model focuses on the ___ relationship between real spending and ____

short run; real GDP

Actual investment spending does not include

spending on consumer durable goods

Examples of assets that are included in household wealth would be

stocks, bonds, and savings accounts

The marginal propensity to save is defined as

the change in saving divided by the change in disposable income

If planned aggregate expenditure is below potential GDP and planned aggregate expenditure equals GDP, then

the economy is in recession

Economists first began studying the relationship between changes in aggregate expenditures and changes in GDP during

the great depression

US net export spending rises when

the growth rate of US GDP is slower than the growth rate of GDP in other countries

Key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by

the level of aggregate expenditure

Housing wealth is equal to

the market value of a house minus the value of loans people have taken out to pay for the house

When aggregate expenditure is more than GDP, what occurs

there was an unplanned decrease in inventories

John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending,

this may benefit the economy in the long run, but could be counterproductive in the short run

At macroeconomic equilibrium

total spending equals total production

The aggregate expenditure model focuses on the relationship between ___ and ___ in the short run, assuming ___ is constant

total spending; real GDP; price level

True/false- the multiplier rises as the MPC rises

true

the larger the MPC, the larger the multiplier

true

true/false- one of the four main categories of spending identified by John Maynard Keynes is consumption

true

true/false- one of the four main categories of spending identified by John Maynard Keynes is government purchases

true

true/false- one of the four main categories of spending identified by John Maynard Keynes is net exports

true

true/false- the formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation, and the interest rate

true

true/false- the multiplier is the ratio of the change in real GDP to the change in autonomous expenditure

true

Following three years of negative growth, restaurant sales in the United States were expected to increase 3.6 percent in 2011. If the increase in restaurant sales increases aggregate expenditure,

unplanned investment will decrease

From 1983-2011, net exports for the US

were negative