ECON 2301 - Chapter 11
If disposable income increases from $4 trillion to $7 trillion, consumption expenditure increases from $3.5 trillion to $5.5 trillion and nothing else changes, the marginal propensity to consume is _____.
0.67 MPC=ΔC/ΔYD MPC -> marginal propensity to consume ΔC -> change in consumption expenditure ΔYD -> change in disposable income The marginal propensity to consume is the fraction of a change in disposable income that is spent on consumption - the change in consumption expenditure divided by the change in disposable income that brought it about.
A decrease in the marginal propensity to import _______, everything else remaining the same.
makes the multiplier larger
A fall in the price level _______.
shifts the AE curve upward and brings a movement down along the AD curve
The marginal propensity to save is _______.
the fraction of a change in disposable income that is saved (Households can only spend their disposable income on consumption or save it. When their disposable income increases, the fraction of the change in disposable income that is saved is the marginal propensity to save.)
The sum of investment, government expenditure and exports, which _____, is called autonomous expenditure.
does not vary with real GDP
The government expenditure multiplier equals the change in _____ that results from a change in government expenditure divided by the change in government expenditure.
equilibrium expenditure and real GDP
All consumption is not induced expenditure because ______.
even a person with no income must buy life's necessities
Disoposable income is aggregate income minus taxes plus _____.
transfer payments
Suppose that the economy is at full employment, the price level is 100, and the multiplier is 2. Investment increases by $100 billion. In the short run, does the price level remain at 100? Explain why or why not.
In the short run, the price level ______ because ______. rises; the short-run aggregate supply curve is upward sloping
Suppose that the economy is at full employment, the price level is 100, and the multiplier is 2. Investment increases by $150 billion. What is the immediate change in the quantity of real GDP demanded? Use the graph to answer this question. Draw the new AD curve. Label it. Draw a point to show the immediate change in the quantity of real GDP demanded. Label it 1. In the short run, does real GDP increase by more than, less than, or the same amount as the immediate change in the quantity of real GDP demanded? Answer by drawing a point at the new short-run macroeconomic equilibrium. Label it 2.
https://photos.app.goo.gl/L5wr1uihac29E2xD8
Consumption expenditure minus _____, which varies with real GDP, is called induced expenditure.
imports
Define and explain how we calculate the marginal propensity to consume and the marginal propensity to save. The marginal propensity to consume is ______.
the fraction of a change in disposable income that is spent on consumption (Households can only spend their disposable income on consumption or save it. When their disposable income increases, the fraction of the change in disposable income that is spent on consumption is the marginal propensity to consume.)
Suppose that the economy is at full employment, the price level is 100, and the multiplier is 2. Investment increases by $100 billion. What is the change in equilibrium expenditure if the price level remains at 100? The change in equilibrium expenditure is $_______ billion.
The change in equilibrium expenditure is $200 billion. (increase in investment x multiplier) (The multiplier is the amount by which a change in autonomous expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP. Investment is an autonomous expenditure.)
If real GDP increases by $2 million and potential GDP increases by $3 million and the marginal propensity to import is 0.2, by how much do imports change?
Imports increase by $400,000 The marginal propensity to import is the fraction of an increase in real GDP that is spent on imports - the change in imports divided by the change in real GDP. If real GDP increases by $2 million and potential GDP increases by $3 million and the marginal propensity to import is 0.2, then the change in imports is the increase in real GDP ($2 million) multiplied by the marginal propensity to import (0.2). So imports increase by 0.2*$2 million = $0.4 million, which is $400,000.
At equilibrium expenditure, aggregate planned expenditure ______ real GDP.
equals graph: https://photos.app.goo.gl/t11WqRHgooCBAVZq6
How do fluctuations in autonomous expenditure influence real GDP? Fluctuations in autonomous expenditure bring ______ fluctuations in real GDP.
magnified
In an economy, when disposable income increases from $400 to $500, consumption expenditure increases from $420 billion to $500. Calculate the marginal propensity to consume, the change in saving, and the marginal propensity to save. 1. The marginal propensity to consume is ____ 2. When disposable income increases from $400 billion to $500 billion, saving increases by $_____ billion 3. The marginal propensity to save is _____
1. The marginal propensity to consume is . 8 2. $20 (Disposable income is equal to consumption expenditure plus saving. Saving is −20 billion dollars when disposable income is $400 billion. Saving is 0 billion dollars when disposable income is $500 billion. So the change in saving when disposable income increases from $400 billion to $500 billion is $20 billion.) 3. The marginal propensity to save is .2 (The marginal propensity to save is the fraction of a change in disposable income that is saved. It is equal to the change in saving divided by the change in disposable income that brought it about. When disposable income increases from $400 billion to $500 billion, saving increases by $20 billion. So the marginal propensity to save equals £20 billion ÷£100 billion, which is 0.2.)
A multiplier is the amount by which a change in any component of _____ is magnified or multiplied to determine the change in _____ and _____ that it generates.
autonomous expenditure; equilibrium expenditure; real GDP
Explain the difference between induced consumption expenditure and autonomous consumption expenditure. Induced expenditure is ______. Autonomous expenditure is ______.
consumption expenditure minus imports, which varies with real GDP; the sum of investment, government expenditure, and exports, which does not vary with real GDP
The consumption function is the relationship between consumption expenditure and _____, other things remaining the same.
disposable income
The relationship between saving and _____, other things remaining the same, is called the saving function.
disposable income
The balanced budget multiplier equals the change in equilibrium expenditure and real GDP that results from equal changes in _____ divided by the change in government expenditure.
government expenditure and lump-sum taxes
If equilibrium expenditure changes by $50 billion that results from an increase in autonomous taxes by $80 billion, find the autonomous tax multiplier.
0.625 (The autonomous tax multiplier equals the change in equilibrium expenditure and real GDP that results from a change in autonomous taxes divided by the change in autonomous taxes. If equilibrium expenditure changes by $50 billion that results from an increase in autonomous taxes by $80 billion, the autonomous tax multiplier is $50/$80 = 0.625)
The graph shows an economy's aggregate demand curve. Investment increases by $0.5 trillion, and the multiplier is 4. Draw a new demand curve that shows the effect of this increase in investment. Label it AD1. Draw a point to indicate the quantity of real GDP demanded following the increase in investment when the price level is 115. Label it B. 1. graph 2. An increase in investment shifts the AE curve _______ and the AD curve _______.
1. https://photos.app.goo.gl/BvBdRLTCuf33CWj6A 2. upward; rightward
Which components of aggregate expenditure are influenced by real GDP?
Consumption expenditure and imports
How do we calculate the effects of real GDP on consumption expenditure and imports by using the marginal propensity to consume and the marginal propensity to import? 1. To calculate the effect of real GDP on consumption expenditure, we need to know ______ . 2. To calculate the effect of real GDP on imports, we need to know ______ .
1. both the marginal propensity to consume and the effect of real GDP on disposable income 2. only the marginal propensity to import
If disposable income increases from $4 trillion to $7 trillion, saving increases from $1.5 trillion to $2 trillion and nothing else changes, the marginal propensity to save is _____.
0.17 MPS=ΔS/ΔYD. MPC -> marginal propensity to consume ΔS -> change in saving ΔYD -> change in disposable income The marginal propensity to save (MPS) is the fraction of a change in disposable income that is saved. It is calculated as the change in saving divided by the change in disposable income.
The figure illustrates the components of aggregate planned expenditure on Turtle Island. https://photos.app.goo.gl/Eyo1q3Gb88pvP2EW6 Turtle Island has no imports or exports, no income taxes, and the price level is fixed. Calculate autonomous expenditure and the marginal propensity to consume in Turtle Island. 1. Autonomous expenditure is $__________ billion. 2. The marginal propensity to consume is ____. 3. What is aggregate planned expenditure when real GDP is $6 billion? $_______ billion. 4. What is happening to inventories when real GDP is $6 billion? Inventories are _____________ 5. What is happening to inventories when real GDP is $4 billion? Inventories are ______________
1. $2 (Autonomous expenditure is the expenditure that takes place at zero real GDP. In Turtle Island, the sum of investment and government expenditure, which does not vary with real GDP, is called autonomous expenditure. Autonomous expenditure is $2 billion.) 2. .6 (slope of AE curve) (Because Turtle Island has no imports and no income taxes, the slope of the AE curve equals the marginal propensity to consume. When real GDP increases from zero to $6 billion, an increase of $6 billion, aggregate planned expenditure increases from $2 billion to $5.6 billion, an increase of $3.6 billion. So the MPC equals $3.6 billion÷$6 billion, which is 0.6.) 3. $5.6 billion 4. increasing 5. decreasing (Click on the graph and set real GDP equal to $4 billion. When real GDP equals $4 billion, aggregate planned expenditure is $4.4 billion. Aggregate planned expenditure exceeds real GDP, so firms are selling what they produce plus some of their inventories. Inventories are decreasing. Now set real GDP equal to $6 billion. When real GDP equals $6 billion, aggregate planned expenditure is $5.6 billion. Aggregate planned expenditure is less than real GDP, so firms are not selling all that they are producing, and their inventories are increasing.)
You are given the following data about an economy that has a fixed price level, no imports, and no taxes. https://photos.app.goo.gl/h4KapB3p25wm9Gsf6 1. The marginal propensity to consume is ______. 2. Autonomous consumption expenditure is $_________ billion. 3. https://photos.app.goo.gl/NojdQDKpdotmEKYo7 4. Calculate the multiplier. The multiplier is ______. 5. The increase in real GDP when autonomous spending increases by $5 billion is $_____ billion. Real GDP increases by more than $5 billion because the increase in real GDP increases _____ .
1. .75 (The marginal propensity to consume equals the fraction of an increase in disposable income that is spent on consumption. When disposable income increases from $100 billion to $200 billion, consumption expenditure increases from $80 billion to $155 billion. The increase in disposable income of $100 billion increases consumption expenditure by $75 billion. The marginal propensity to consume equals $75 billion ÷$100 billion, which equals 0.75. Key Point: The marginal propensity to consume is the fraction of an increase in disposable income that is spent on consumption.) 2. 5 (Autonomous consumption expenditure is the amount of consumption expenditure when disposabale income is zero.) 3. https://photos.app.goo.gl/VfQAPtU7CngRYrT69 (Disposable income is spent on consumption or saved. Saving = Disposable income - Consumption expenditure. When disposable income increases by $100 billion, saving increases by $25 billion, so the marginal propensity to save equals 0.25.) 4. 4 (When the price level is fixed, the multiplier equals 1/(1- Slope of the AE curve). With no income taxes, the slope of the AE curve equals the marginal propensity to consume (MPC), which is 0.75. The multiplier = 1/(1 - 0.75) = 1/0.25 = 4. Because (1 - MPC ) = MPS, the multiplier also equals 1/MPS. Key Point: With a fixed price level, the multiplier equals 1/(1 - MPC ) or 1/MPS.) 5. 20; induced consumption expenditure (The increase in real GDP when the price level is fixed equals the change in autonomous spending multiplied by the multiplier. That is, Change in real GDP = Change in autonomous spending × Multiplier. Change in real GDP = $5 billion ×4 = $20 billion. An increase in autonomous spending increases income, which increases induced consumption expenditure, which in turn increases income. The quantity of real GDP demanded increases by more than the increase in autonomous expenditure. Key Point: With a fixed price level, real GDP increases by more than the increase in autonomous spending because induced consumption expenditure increases.)
An economy has a fixed price level, no imports, and no income taxes. MPC is 0.9, and real GDP is $100 billion. Businesses increase investment by $2 billion. Calculate the multiplier and the change in real GDP. 1. The multiplier is ____. 2. The increase in real GDP is $________ billion.
1. 10 (The multiplier equals 1÷(1−Slope of AE curve). In an economy with no imports or income taxes, the slope of the AE curve equals the MPC, which is 0.9. So the multiplier equals 1÷(1−0.9), which is 10.) 2. 20 (The change in real GDP equals the change in investment multiplied by the multiplier. The change in real GDP equals $2 billion×10, which is $20 billion.)
An economy has a fixed price level, no imports, and no income taxes. MPC is 0.8, and real GDP is $100 billion. Businesses increase investment by $5 billion. Calculate the new level of real GDP and explain why real GDP increases by more than $5 billion. 1. The new level of real GDP is $_______ billion. 2. Real GDP increases by more than $5 billion because the increase in investment _______.
1. 125 The change in real GDP equals the change in investment multiplied by the multiplier ( Multiplier = 1/(1 - MPC) ) so the change in real GDP equals $5 billion×5, which is $25 billion. The initial value of real GDP is $100 billion and the change in real GDP is $25 billion. So the new value of real GDP is $100 billion + $25 billion = $125 billion. 2. induces an increase in consumption expenditure (Real GDP increases by more than $10 billion because the initial increase in investment increases real GDP, which increases disposable income. The increase in disposable income increases consumption expenditure, and the increase in consumption expenditure adds even more to aggregate expenditure. Real GDP and disposable income increase further and so does consumption expenditure. The multiplier determines the magnitude of the increase in aggregate expenditure that results from the increase in investment.)
If autonomous expenditure decreases with no change in the price level, what happens to the AE curve and the AD curve? Which curve shifts by an amount that is determined by the multiplier and why? 1. The ______ curve shifts downward by an amount equal to the decreases in autonomous expenditure. The ______ curve shifts leftward by an amount equal to the decreases in autonomous expenditure times the multiplier because the ______ at each price level. 2. Illustrate the effect of a change in autonomous expenditure. Investment decreases by $0.5 trillion, and the multiplier is 4. Draw a new aggregate demand curve that shows the effect of the decrease in investment. Label it AD1. Draw a point to indicate the quantity of real GDP demanded following the decrease in investment when the price level is 115. Label it B.
1. AE; AD; AD curve plots equilibrium expenditure (The AE curve plots aggregate planned expenditure at each level of real GDP. Autonomous expenditure is a component of aggregate planned expenditure. So the AE curve shifts downward by an amount equal to the decreases in autonomous expenditure. The AD curve plots equilibrium expenditure at each price level. Equilibrium expenditure equals autonomous expenditure times the multiplier. So the AD curve shifts leftward by an amount equal to the decreases in autonomous expenditure times the multiplier.) 2. https://photos.app.goo.gl/KpuUZzLWoWPHPcVB7
You are given the following data about an economy that has a fixed price level, no imports, and no taxes. https://photos.app.goo.gl/dUGWaHPNWzru8d8N8 Calculate the marginal propensity to consume. 1. The marginal propensity to consume is _______. 2. Autonomous consumption expenditure is $____ billion. 3. Calculate saving at each level of disposable income and the marginal propensity to save. Fill in the saving numbers in the table below. https://photos.app.goo.gl/NojdQDKpdotmEKYo7
1. The marginal propensity to consume is .75 The marginal propensity to consume equals the fraction of an increase in disposable income that is spent on consumption. When disposable income increases from $100 billion to $200 billion, consumption expenditure increases from $80 billion to $155 billion. The increase in disposable income of $100 billion increases consumption expenditure by $75 billion. The marginal propensity to consume equals $75 billion ÷$100 billion, which equals 0.75. 2. Autonomous consumption expenditure is $5 billion. (Autonomous consumption expenditure is the amount of consumption expenditure when disposabale income is zero.) 3. https://photos.app.goo.gl/VfQAPtU7CngRYrT69 (Saving = Disposable income - Consumption expenditure. For example, when disposable income is $100 billion, consumption expenditure is $80 billion, so saving is $20 billion. The marginal propensity to save equals the fraction of an increase in disposable income that is saved. When disposable income increases by $100 billion, saving increases by $25 billion, so the marginal propensity to save equals 0.25. Key Point: The marginal propensity to consume plus the marginal propensity to save equals 1.)
An economy has a fixed price level, no imports, and no income taxes. An increase in autonomous expenditure of $2 trillion increases equilibrium expenditure by $8 trillion. Calculate the multiplier and the marginal propensity to consume.
1. The multiplier is 4. (The multiplier is equal to the change in equilibrium expenditure divided by the change in autonomous expenditure. So the multiplier = $8 trillion÷2 trillion, which is 4.) 2. The marginal propensity to consume is .75 In an economy with no imports or taxes, the multiplier equals 1÷(1−MPC). Rearranging, MPC = 1−(1÷Multiplier) = 1−(1÷4) = 0.75. 3. If an income tax is introduced in this economy, the multiplier DECREASES. (An increase in investment increases real GDP. Suppose an income tax is introduced. With the introduction of income tax payments, disposable income increases by less than the increase in real GDP and consumption expenditure increases by less than it would if taxes had not been introduced. The multiplier decreases.)
1. What is the multiplier? The multiplier is the amount by which the change in ______ expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP. What does it determine? For every dollar increase in ______ expenditure, the multiplier determines the increase in real GDP. ----------------------------------------------------------------------------- 2. Why does it matter? The multiplier matters because we can use it to determine by how much we should change autonomous expenditure to ______.
1. autonomous; autonomous (When autonomous expenditure increases, aggregate expenditure increases and so does equilibrium expenditure and real GDP. The increase in real GDP is larger than the change in autonomous expenditure because the initial increase in real GDP induces further expenditure.) -------------------------------------------------------------- 2. increase real GDP by a given amount
If real GDP and aggregate expenditure are less than equilibrium expenditure, what happens to firms? inventories? How do firms change their production? And what happens to real GDP? 1. Firms' inventories __________ 2. ... so they ______ production, and real GDP ______.
1. decrease (When real GDP and aggregate expenditure are less than equilibrium expenditure, an unplanned decrease in inventories occurs.) 2. increase; increases (Firms increase production to restore inventories to the planned level. The increase in production increases real GDP.)
Click on the icon to study Economics in the News. Then complete the following steps. 1. If the unplanned change in inventories was $0.06 trillion, what was the planned change, and what role did it play in shifting the AE curve and changing equilibrium expenditure? Use a two-part figure to answer this question. In the left graph, the AE0 curve shows aggregate planned expenditure when the planned change in inventories is zero. Draw the AE curve when the actual change in inventories is zero and the unplanned change is $0.6 trillion. Label it AE1. Draw a point on AE1 to show the quantity of real GDP at which unplanned inventories increased by $0.06 trillion. In the right graph, draw a curve to show the unplanned inventory changes that correspond to the AE1 curve you've drawn. 2. The BEA data show that exports of goods and services were up 3.7 percent and imports of goods and services were up 1.6 percent. Were these increases in expenditure increases in autonomous expenditure or increases in induced expenditure? The increase in exports was an increase in _______ expenditure, and the increase in imports was an increase in _______ expenditure. 3. How do exports and imports influence the magnitude of the multiplier? 4. What is the value of the autonomous expenditure multiplier? The autonomous expenditure multiplier is ___
1. graph (idk why but it would not let me graph on this question) 2. autonomous; induced 3. As the marginal propensity to import increases, the magnitude of the multiplier decreases. 4. The autonomous expenditure multiplier is 2
Suppose that the economy is at full employment, the price level is 100, and the multiplier is 2. Investment increases by $100 billion. The graph shows the effect of the increase in investment on aggregate demand. The AD curve has shifted from AD0 to AD1. In the long run, does real GDP increase by more than, less than, or the same amount as the immediate increase in the quantity of real GDP demanded? Explain how the price level changes in the long run. To answer these questions, draw a curve that shows how the economy returns to long-run equilibrium. Label it. Draw a point at the new long-run equilibrium. 1. graph 2. In the long run, the price level rises ______.
1. https://photos.app.goo.gl/2va4vdqpUc71Yq8i7 (The economy is in an above full-employment equilibrium. To return to long-run equilibrium, the money wage rates rises and the short-run aggregate supply curve shifts leftward.) 2. by more than it does in the short run (The graph shows that at the long-run equilibrium, the price level is 140 at the intersection of the AD1 curve, the SAS1 curve, and the LAS curve. In the short run, the price level is 120 at the intersection of the AD1 curve and the SAS0 curve. In the long run, the price level rises by more than it does in the short run.)
How does an increase in autonomous expenditure change real GDP in the short run? Does real GDP change by the same amount as the change in aggregate demand? Why or why not? Use the graph to answer these questions. AD0 is the aggregate demand curve when investment is $1.0 trillion. Investment increases to $1.5 trillion, and the multiplier when the price level is constant is 8. 1. Draw the new aggregate demand curve and label it. Draw a point to indicate the quantity of real GDP demanded if the price level remains at 115. Label it 1. Draw a point at the new short-run equilibrium. Label it 2. The size of the multiplier in the short run is _____
1. https://photos.app.goo.gl/fuXEfsrGcSpZVxcq7 (The aggregate demand curve shifts rightward by an amount equal to the change in investment multiplied by the multiplier. The change in investment is $0.5 trillion and the multiplier is 8, so the aggregate demand curve shifts rightward by $4 trillion. The new short-run macroeconomic equilibrium occurs at the intersection of the SAS and the AD1 curves. The price level is 125 and real GDP is $14 trillion.) 2. The size of the multiplier in the short run is 4 (When investment increases by $0.5 trillion, the quantity of real GDP demanded in the short run increases from $12 trillion to $14 trillion, an increase of $2 trillion. The multiplier equals the change in real GDP divided by the change in investment, which is $2 trillion÷$0.5 trillion = 4.)
Click on the icon to read the news clip, then complete the following steps. The graph shows China's aggregate planned expenditure curve. Draw a new AE curve that shows the effects of the increase in investment in China if China's equilibrium expenditure increases to 13 trillion yuan. Label it. Draw a point at the new equilibrium expenditure. 1. graph 2. China's equilibrium expenditure increases by _______ the change in investment because _______.
1. https://photos.app.goo.gl/nGM65tJ2YNGsWSgc7 (When investment increases, the AE curve shifts upward by the amount of the investment. Equilibrium expenditure, which is determined at the intersection of the new AE curve and the 45° line increases.) 2. more than; induced expenditure increases
How does real GDP change in the long run when autonomous expenditure increases? Does real GDP change by the same amount as the change in aggregate demand? Why or why not? Use the graph to answer these questions. AD0 is the aggregate demand curve when investment is $1.0 trillion. Investment increases to $1.5 trillion, and the multiplier when the price level is constant is 8. Draw the new aggregate demand curve and label it. Draw a point to indicate the quantity of real GDP demanded if the price level remains at 115. Label it 1. Draw a point at the new short-run equilibrium. Label it 2. Draw the short-run aggregate supply curve at the new long-run equilibrium. Label it. Draw a point at the new long-run equilibrium. Label it 3. 1. graphing 2. The size of the multiplier in the long run is ____
1. https://photos.app.goo.gl/xcd66gCN37woyUS67 (The aggregate demand curve shifts rightward by an amount equal to the change in investment times the multiplier. The change in investment is $0.5 trillion and the multiplier is 8, so the aggregate demand curve shifts rightward by $4 trillion. In the short-run, real GDP exceeds potential GDP. The labor force is more than fully employed. In the long run, shortages of labor increase the money wage rate. The rise in the money wage rate shifts the short-run aggregate supply curve leftward until the economy is back at its full-employment equilibrium.) 2. The size of the multiplier in the long run is 0 (When investment increases by $0.5 trillion, the quantity of real GDP demanded in the long run remains at $12 trillion. The multiplier equals the change in real GDP divided by the change in investment, which is $0÷$0.5 trillion = 0. In the long run, the change in the quantity demanded is zero because the economy returns to its long-run equilibrium.)
If real GDP and aggregate expenditure are greater than equilibrium expenditure, what happens to firms? inventories? How do firms change their production? And what happens to real GDP? 1. Firms' inventories _______________, ... 2. ... so they _______ production, and real GDP _______.
1. increase (When real GDP and aggregate expenditure are greater than equilibrium expenditure, an unplanned increase in inventories occurs.) 2. decrease; decreases (Firms decrease production to restore inventories to the planned level. The decrease in production decreases real GDP)
1. The multiplier increases when the marginal propensity to consume _______________. 2. The multiplier increases when the marginal propensity to import ______ or the income tax rate ______.
1. increases (An increase in the marginal propensity to consume increases the multiplier. When investment increases, income increases, and the greater the marginal propensity to consume, the greater the consumption expenditure for a given increase in income.) 2. decreases; decreases (A decrease in the marginal propensity to import increases the multiplier. When investment increases, income increases, and the smaller the marginal propensity to import, the smaller is the quantity of imports for a given increase in income. Remember that only expenditure on U.S.-produced goods and services increases U.S. real GDP. A decrease in the income tax rate increases the multiplier. When investment increases, income increases, and income taxes increase. With the increase in income taxes, the increase in disposable income is less than it otherwise would be. So the lower the income tax rate, the less negative effect on disposable income and consumption expenditure.)
U.S. Wholesale Inventories Post Biggest Gain in Six Months The Commerce Department reported that wholesale inventories rose 0.7 percent in May and by 0.6 percent in June. Inventory investment had a neutral effect on second quarter GDP growth. Source: U.S. News and World Report, August 9, 2017 1. Explain why an increase in inventories might bolster economic growth, while a fall in inventories might be a sign of recession. In your explanation, distinguish between planned and unplanned changes in business inventories. A planned increase in inventories ______ equilibrium expenditure and it ______ real GDP. A planned decrease in inventories ______ equilibrium expenditure and it ______ real GDP. 2. An unplanned increase in inventories ______ equilibrium expenditure and it ______ real GDP. An unplanned decrease in inventories ______ equilibrium expenditure and it ______ real GDP.
1. increases; increases; decreases; decreases 2. does not change; decreases; does not change; increases
Read the news clip, then answer the following questions. Consumer Growth Could Buoy China's Economy Annual double-digit wage growth since 2000 has created a Chinese middle class ready to spend. And spend they have. Spending by China's consumers has grown at double-digit rates for a decade. Digital Luxury Group, a Geneva-based market researcher, reports that Chinese travelers made 70 million overseas trips in 2011 to places that include Bali, Dubai, Paris, London, Singapore, and Hong Kong. To cope with all this extra travel, China plans to build 56 new airports before the end of 2016. China's wealthy consumers in aggregate are poised to spend more on luxury goods than consumers in Japan and the United States. Source: The New York Times, August 13, 2012 1. An increase in overseas travel and vacations _______, everything else remaining the same. 2. Starting from a long-run equilibrium, China's consumption expenditure _______ real GDP in the countries to which Chinese tourists travel in the short run. In the long run, real GDP in the countries to which Chinese tourists travel _______.
1. increases China's imports and decreases China's real GDP (Overseas travel and vacations by China's residents are Chinese imports. An increase in overseas travel and vacations increases China's imports. And an increase in imports decreases China's real GDP.) 2. increases; does not change (Overseas travel and vacations by China's residents are exports of the countries to which the Chinese residents travel. In the short run, the AE curve of each of these countries shifts upward and equilibrium expenditure and real GDP increases. But in the long run, the multiplier is zero and there is no change in real GDP.)
Read the news clip, then answer the following questions. 1. The MPS in the United States is __________ than the MPS in China, and the MPC in the United States is ___________ than the MPC in China. 2. A reason for the difference in the values between the countries may be ______. The U.S. and China's Savings Problems Last year China saved about half of its gross domestic product while the United States saved only 13 percent of its national income. The contrast is even starker at the household level—a personal saving rate in China of about 30 percent of household income, compared with a U.S. rate that dipped into negative territory last year (−0.4% of after-tax household income). Similar extremes show up in the consumption shares of the two economies. Source: Fortune, March 8, 2006
1. lower, higher (MPS = marginal propensity to save The news article tells us that the personal saving rate in China is about 30 percent of household income, while the U.S. personal saving rate is −0.4 percent of after-tax household income. So as disposable income increases, the Chinese save more than Americans. The MPS is smaller in the United States than in China. And because MPC = 1−MPS, it must be the case that the MPC in the United States is larger than the MPC in China.) 2. U.S. consumers are more confident about the future (One reason why the MPC is larger in the United States is that U.S. consumers are more confident about the future and don't feel it necessary to save as much as Chinese consumers.)
Read the news clip, then answer the following questions. 1. The MPS in the United States is ______ today than it was before 1984, and the MPC in the United States is ______ today than it was before 1984. 2. Possible reasons for the difference could be _______. Collapsing Savings Rate Before 1984, the U.S. savings rate held steady for decades, though it dipped during the Great Depression and rose sharply during WWII, when there was little to buy besides war bonds. The rate dipped briefly again after WWII, and then rose steadily until 1984, when saving was 10.2 percent of income. Since 1984, saving has fallen to between 2 percent and 3 percent of income. Source: Deseret, August 18, 2012
1. lower; higher (The marginal propensity to save is the fraction of a change in disposable income that is saved. The news clip tells us that the saving rate fell from 10.2 percent of income in 1984 to between 2 percent and 3 percent of income today. And because MPC = 1−MPS, it must be the case that the MPC in the United States has become larger since 1984.) 2. a lower return to saving (One reason why the MPC is growing and the MPS is decreasing is the lower interest rates decrease the return to saving and at the same time decrease the cost of borrowing.)
1. Equilibrium expenditure comes about because firms change their ______ in response to unplanned changes in ______. 2. Draw a point on the AE curve at which planned expenditure exceeds real GDP. Label it 1. Draw a point on the AE curve at which real GDP exceeds planned expenditure. Label it 2. 3. When aggregate planned expenditure is less than real GDP, inventories are _______, so production ______ and inventories return to their target level as the economy moves to equilibrium expenditure. 4. When aggregate planned expenditure is greater than real GDP, inventories are _______, so production ______ and inventories return to their target level as the economy moves to equilibrium expenditure.
1. production; inventories 2. graph: https://photos.app.goo.gl/DoTw6DkiGZvTnMze9 (Along the 45 degree line, aggregate expenditure equals real GDP. At points on the AE curve above the 45 degree line, the value of aggregate expenditure is greater than the value of real GDP. At points on the AE curve below the 45 degree line, the value of aggregate expenditure is less than the value of real GDP.) 3. above target; decreases 4. below target; increases
Read the news clip, then answer the following question. The New Deal Remember what was actually in the stimulus bill of 2009: slightly more than $600 billion went toward poor and middle-class tax cuts, safety net spending (more unemployment assistance and food stamps), and aid to state governments with budget shortfalls. These are the most directly stimulative parts of the bill, bolstering demand and preventing lay-offs—and stimulate they did. Economists of differing ideological stripes generally agree that the economy would have as many as 3 million fewer jobs now were it not for the stimulus. The remaining sixth of the bill focused on longer-term investments, which included putting $90 billion into green energy. Source: Financial Times, September 2, 2012 1. Consider the $600 billion mentioned in the news clip as $600 billion worth of tax cuts. Suppose that people spend $180 billion of the $600 billion worth of tax rebates in the first 3 months, and $198 billion during the following three months. Choose the statement that is incorrect. The $600 billion worth of tax cuts to American consumers increases aggregate expenditure by ______.
1. $378 billion regardless of the multiplier (The initial increase in consumption expenditure is $378 billion. The change in equilibrium expenditure is equal to the multiplier multiplied by the change in consumption expenditure. If the multiplier is greater than 1.6, then the multiplier multiplied by $378 billion is greater than $600 billion. If the multiplier is less than 1.6, then the multiplier multiplied by $378 billion is less than $600 billion. If the multiplier is equal to 1.6, then the multiplier multiplied by $378 billion is equal to $600 billion. Only if the multiplier is equal to 1 is the change in equilibrium expenditure equal to the initial increase in consumption expenditure of $378 billion.)
Suppose that the economy is at full employment, the price level is 100, and the multiplier is 2. Investment increases by $100 billion. Are the values of the multipliers in the short run and the long run larger or smaller than 2? Use the graph to answer this question. It shows the economy initialy at the intersection of the LAS, AD0, and SAS0 curves. After the increase in investment, the AD curve shifted to AD1. Calculate the multipliers in the short run and in the long run. In the short run, the multiplier is _______ and in the long run, the multiplier is ___________.
1;0 (The multiplier is equal to the change in equilibrium expenditure divided by the change in autonomous expenditure. In the short run when investment increases by $100 billion, the aggregate demand curve shifts rightward and equilibrium real GDP increases from $1,000 billion to $1,100 billion, an increase of $100 billion. The change in investment is a change in autonomous expenditure, so the multiplier is equal to $100 billion÷$100 billion, which is 1.0. The economy is in an above full-employment equilibrium. In the long run, the money wage rate rises, and the short-run aggregate supply curve shifts leftward from SAS0 to SAS1. Real GDP returns to its full-employment level of $1,000 billion. So in the long run, there is no change in equilibrium expenditure. So the multiplier is equal to $0 billion÷$100 billion, which is 0.)
Aggregate planned expenditure is the sum of planned _____.
consumption expenditure, investment, government expenditure and exports minus imports
How does a change in the price level influence the AE curve and the AD curve? Use the graphs to answer this question. The left graph shows an economy's aggregate planned expenditure curve. The right graph shows its aggregate demand curve. Equilibrium expenditure is $12 trillion and the price level is 110. Suppose the price level falls to 90 and the new equilibrium expenditure is $13 trillion. In the left graph, draw the AE curve that shows the effect of this event. Label it. Draw a point to show the new equilibrium expenditure. In the right graph, draw a point on the AD curve at the new equilibrium real GDP and price level. Draw an arrow on the curve that shows the effect of the fall in price level.
https://photos.app.goo.gl/Q1bCNvujaHCg9YYMA Other things remaining the same, the lower the price level, the greater is the purchasing power of wealth. For a given expected future price level, a fall in the price level today makes current goods and services less expensive relative to future goods and services. This results in an intertemporal substitution toward buying more goods and services today. And a fall in the U.S. price level, other things remaining the same, makes U.S.-produced goods and services less expensive relative to foreign-produced goods and services. So when the price level falls, aggregate planned expenditure increases at every level of real GDP. The AE curve shifts upward. The aggregate demand curve shows the relationship between the quantity of real GDP demanded and the price level. When the price level changes, there is a movement along the curve—a fall in the price level increases the quantity of real GDP demanded and there is a movement down along the AD curve.
Click on the icon to read the news clip, then complete the following steps. Potential GDP is $12 trillion. In the short run, fiscal stimulus increases equilibrium real GDP to $12.2 trillion. In the left graph, draw the AE curve at short-run equilibrium. Label it AE1. Draw the AE curve at long-run equilibrium. Label it AE2. In the right graph, draw the AD curve at short-run equilibrium and label it. Draw the SAS curve at long-run equilibrium and label it. Draw a point at the long-run equilibrium.
https://photos.app.goo.gl/gwtNL92eSgcN37FR7
Suppose that the economy is at full employment, the price level is 100, and the multiplier is 2. Investment increases by $50 billion. What is the immediate change in the quantity of real GDP demanded? Use the graph to answer this question. Draw the new AD curve. Label it. Draw a point to show the immediate change in the quantity of real GDP demanded. Label it 1. In the short run, does real GDP increase by more than, less than, or the same amount as the immediate change in the quantity of real GDP demanded? Answer by drawing a point at the new short-run macroeconomic equilibrium. Label it 2.
https://photos.app.goo.gl/muNfDeqqJMiGUuuUA (The change in investment is $50 billion and the multiplier is 2, so the aggregate demand curve shifts rightward by $100 billion. At a price level of 100, the quantity of real GDP demanded on AD1 is $1,100 billion. The new short-run macroeconomic equilibrium occurs at the intersection of the SAS and the AD1 curve. The new short-run macroeconomic equilibrium occurs at a price level of 110 and real GDP of $1,050 billion.)
We calculate the marginal propensity to consume as ______, and the marginal propensity to save as ______.
ΔC÷ΔYD; ΔS÷ΔYD
Explain how an increase in business investment at a constant price level changes equilibrium expenditure. Business investment is a component of ______ aggregate expenditure. When it increases, the AE curve ______ and equilibrium expenditure increases.
autonomous; shifts upward (Investment is a component of autonomous expenditure. When autonomous expenditure increases, the AE curve shifts upward and intersects the 45° line at a greater quantity of real GDP. Equilibrium expenditure increases.)
