Macroeconomics Chapter 30-31 Test

inflation rate

% change in price level; the higher the inflation rate the higher the price level

if the expenditure multiplier equals 4, then a $0.25 trillion increase in investment increases real GDP by how much?

4 = x / 0.25 x = $1 trillion

if the expenditure multiplier equals 5 and there is a $3 million increase in investment, what happens to equilibrium expenditure?

5 = x / 3 x = 15 equilibrium expenditure increases by $15 million

real GDP at full employement

= potential GDP and unemployment rate = natural unemployment rate

how does the real wage rate affect the AS curve?

along the curve the rate is fixed so an increase in price level causes a decrease in real wage rate which increases the quantity of labor employed and increases quantity of real GDP supplied

when disposable income increases from $9 trillion to $10 trillion and consumption expenditure increases from $6 trillion to $6.8 trillion, what is the MPC?

MPC = change in consumption expenditure / change in disposable income = 0.8 / 1 = 0.8

change in consumption expenditure =

MPC x change in real GDP

what does a change in price level do to the aggregate expenditure curve?

a change in price level changes the buying power of money, real interest rate, and prices of imports and exports; as it increases, the curve shifts left; as it decreases the curve shifts right

how does an increase in price level affect the phillips curve?

a rise in price level increases the inflation rate which increases the labor employed and decreases unemployment; mvmnt right on the curve

expansion on phillips curve

above anchor point; inflation is high and unemployment is low

what happens when aggregate planned expenditure is exceeded by real GDP?

above equilibrium; firms want to decrease their inventory so they decrease production

what is autonomous expenditure a component of?

aggregate expenditure that DOES NOT change when real GDP changes

disposable income

aggregate income (GDP) - net taxes (aka taxes paid to the gov - transfer payment received)

what happens when expansion is triggered by an increase in autonomous expenditure?

aggregate planned expenditure is greater than real GDP; multiplier causes expansion to increase

aggregate expenditure model

aka Keynesian model, explains what determines the quantity of real GDP demanded and changes in that quantity at given price levels

expenditure multiplier

amount by which a change in any component of autonomous expenditure is magnified/multiplied to determine the change in equilibrium expenditure and real GDP it generates

why is the expenditure multiplier larger than 1?

an increase in autonomous expenditure induces further increases in aggregate expenditure

how does the expenditure multiplier work?

an increase in investment increases real GDP which increases disposable income and consumption expenditure which adds to the increase in investment; the multiplier determines the magnitude of the resulting increase in aggregate expenditure

where does equilibrium expenditure occur?

at the intersection of the aggregate expenditure curve and the 45* line

what does consumption expenditure = ?

autonomous expenditure + induced expenditure

what does the Fed have to do to lower the expected inflation rate?

conduct monetary policy that creates confidence about the future inflation rate

induced expenditure

consumption expenditure - imports

dissaving

consumption expenditure is greater than disposable income so saving is negative

the consumption function is the relationship btwn _____ and _____

consumption expenditure, disposable income

what are the components of aggregate expenditure?

consumption expenditure, investment, government expenditure, and net exports

what does an increase in price level do to expenditure?

decreases aggregate planned expenditure and equilibrium expenditure

how does a decrease in wealth or expected future income affect consumption expenditure?

decreases consumption now = increase in saving

what does a decrease in the marginal propensity to consume do to the expenditure multiplier?

decreases it

what does a stock market crash during a recession do to consumption expenditure?

decreases it

what does an increase in autonomous spending do to the expenditure multiplier?

decreases it

what does an increase in investment do to the expenditure multiplier?

decreases it

what does an increase in the marginal tax rate do to the expenditure multiplier?

decreases it but CANNOT make it negative

marginal tax rate

determines the extent of change in income taxes when real GDP changes; MTR = change in tax payments / change in real GDP

what are the factors that affect job rationing?

efficiency wages, minimum wage laws, union wages

real GDP > potential GDP

employment exceeds full employment level and unemployment rate falls below natural unemployment rate

real GDP < potential GDP

employment is less than full employment level and unemployment rate rises above natural employment rate

what does a decrease in price level do to expenditure?

increases aggregate planned expenditure and equilibrium expenditure

what happens to induced expenditure as GDP increases?

increases bc increase in consumption expenditure is greater than the increase in imports

how does an increase in wealth or expected future income affect consumption expenditure?

increases consumption now = decrease in saving

what does a decrease in the marginal propensity to import do to the expenditure multiplier?

increases it

aggregate planned expenditure

induced + autonomous

what are the components of aggregate expenditure that change when real GDP changes?

induced expenditure

expected inflation rate

inflation rate that people forecast and use to set the money wage rate and other money prices

autonomous expenditure

investment + gov expenditure + autonomous consumption expenditure; DOES NOT respond directly to changes in real GDP; increases as real GDP increases but not by the same amount

when a higher inflation rate is expected what happens to the money wage rate?

it increases

if unplanned investment occurs then where does aggregate expenditure relate to equilibrium?

it is NOT at its equilibrium level

what are the factors that affect natural unemployment?

job search, job rationing

the greater the marginal propensity to consume the _____ the expenditure multiplier

larger

how does a decrease in AD that brings movement down along the AS curve affect the phillips curve?

lowers price level and decreases real GDP bringing the same mvmnt down along the phillips curve

how do increases in imports and income taxes (marginal tax rate) affect the multiplier?

make it smaller

how does a low marginal tax rate affect the expenditure multiplier?

makes it larger

how does a high marginal tax rate affect the expenditure multiplier?

makes it smaller

if the slope of the aggregate expenditure curve is 0.5, then what does the expenditure multiplier equal?

multiplier = 1 / 1 - slope of AE curve = 1 / (1 - 0.5) = 1 / 0.5 = 2

how does mvmnt along the AS curve correlate with the phillips curve?

mvmnt along AS curve = mvmnt along phillips curve

what do changes in price level represent on the aggregate demand curve?

mvmnt along the curve

equilibrium expenditure

occurs when aggregate planned expenditure = real GDP; where production and spending plans agree

aggregate planned expenditure

planned consumption expenditure + planned investment + planned gov expenditure + (planned exports - planned imports)

what is autonomous consumption?

the amount of consumption expenditure that would take place in the short run even if there is no current income (financed by savings and loans)

what is the result when the Fed tries to conduct monetary policy to lower unemployment?

the decrease in unemployment = increase in inflation; if a higher inflation rate becomes expected, wages and prices rise causing the actual inflation rate to rise shifting the phillips curve up; eventually unemployment will return to its original state with a permanently higher inflation rate

marginal propensity to consume

the fraction of a change in disposable income spent on consumption; MPC = change in consumption expenditure / change in disposable income

marginal propensity to import

the fraction of an increase in real GDP spent on imports; MPI = change in imports / change in real GDP

how does the MPC affect the multiplier

the greater the MPC, the larger the multiplier; the smaller the MPC, the smaller the multiplier

why do the AS and phillips curve look the way they do?

the money wage rate is fixed in the short run

why does a change in inflation cause unemployment to change?

the real wage rate changes as inflation changes causing a change in the quantity of labor demanded

what does a change in the expected inflation rate do to the short run phillips curve?

the short run curve shifts to intersect the long run curve at the new expected inflation rate

what does the phillips curve demonstrate?

the trade off btwn unemployment and inflation; a higher unemployment or inflation rate brings a lower inflation or unemployment rate

if real GDP is above equilibrium expenditure, what happens to inventories?

they are above their target or desired level

if real GDP is below equilibrium expenditure, what happens to inventories?

they are below their target or desired level

if real GDP equals aggregate planned expenditure, what happens to inventories?

they are equal to their target or desired levels

why is the long run phillips curve vertical?

unemployment will always return to the natural unemployment rate in the long run but the inflation rate can still have any value

as disposable income increases, what happens to consumption?

planned consumption expenditure increases but the increase in consumption expenditure is less than the increase in disposable income

when consumption expenditure is less than disposable income, saving is _____

positive

what does equilibrium expenditure depend on?

price level

in a given period with a fixed amount of capital and given state of technology, what does real GDP depend on?

quantity of labor employed

how does an increase in AD that prints mvmnt up along the AS curve affect the phillips curve?

raises price level and increases real GDP bringing the same mvmnt along the phillips curve

what happens when recession is triggered by a decrease in autonomous expenditure l?

real GDP is greater than aggregate planned expenditure; multiplier intensifies decrease and allows recession to take hold

what does the multiplier do at the beginning of a recession?

reinforces the initial cut in autonomous expenditure and adds force to the recession

aggregate expenditure curve

relationship btwn aggregate planned expenditure and real GDP when all other influences on expenditure plans are the same; mvmnt along the curve occurs bc of changes in real GDP

consumption function

relationship btwn consumption expenditure and disposable income other things remaining the same

long run phillips curve

relationship btwn inflation and unemployment when the economy is at full employment

aggregate demand curve

relationship btwn the quantity of real GDP demanded and price level when all other influences on expenditure plans remain the same; mvmnt along the curve occurs bc of changes in price level

what happens to the inflation rate during expansion?

rises above trend

what happens to the long and short run phillips curves when the natural unemployment rate decreases?

shift left

what happens to the long and short run phillips curves when the natural unemployment rate increases?

shift right

short run phillips curve

shows the relationship btwn the inflation rate and unemployment rate when natural unemployment rate and inflation rate remain constant

what does the marginal propensity to consume represent?

slope of the consumption function

how does the Fed fix the permanently high inflation rate once it has taken hold?

slows money growth rate and raises interest rates to slow the growth rate of AD; induces a recession until equilibrium is reached again at a lower inflation rate

the smaller the marginal propensity to consume the _____ the expenditure multiplier

smaller

what is the effect of a larger marginal tax rate?

smaller change in disposable income and real GDP after a change in autonomous expenditure (smaller multiplier)

what does the Fed do to lower unemployment?

speeds up AD growth by increasing the money growth rate and lowering interest rates

expenditure multiplier using MPC

1 / (1 - MPC) x change in investment

what is the amount of induced consumption if disposable income = $150 and autonomous consumption = $50?

150 - 50 = $100

what are the factors that affect job search?

changes in demographic, unemployment compensation, and structural change

recession on phillips curve

below anchor point; inflation is low and unemployment is high

what happens when aggregate planned expenditure exceeds real GDP?

below equilibrium; firms want to increase inventory so increase production

change in real GDP =

change in consumption expenditure + change in investment

influences on consumption expenditure

change in disposable income, change in real interest rate, wealth and expected future income

expenditure multiplier formula

change in equilibrium expenditure / change in autonomous expenditure = change in real GDP / change in investment

if the marginal propensity to consume is 0.8, what is the expenditure multiplier?

change in real GDP / change in investment = 1 / 1 - MPC = 1 / (1 - 0.8) = 1 / 0.2 = 5

the expenditure multiplier is equal to the change in _____ divided by the change in _____

equilibrium expenditure, autonomous expenditure

why does the unemployment rate return to natural unemployment in the long run?

eventually the money wage rate changes to catch up with the change in price level brought about by inflation

what happens to the inflation rate during recessions?

falls below trend

aggregate expenditure model

firms change production when sales and inventories change but DON'T change prices

what is the difference btwn aggregate expenditure and aggregate planned expenditure?

firms' change in inventory bc of consumption is unplanned; this is counted in aggregate expenditure but NOT aggregate planned expenditure

equilibrium expenditure is the level of expenditure at which _____

firms' inventories are at their desired levels

okun's law

for each % point that the unemployment rate is above or below the natural unemployment rate, real GDP is 2% below or above potential GDP

what does inflation do to the real wage rate?

forces it to increase to keep the market for labor in equilibrium; bc of inflation a constant money wage rate = a falling real wage rate

rational expectation

forecast of the inflation rate based on the Fed's forecasted monetary policy (dominant factor) along with the forecasts of other forces that influence AD and AS

how are disposable income and consumption expenditure affected by changes in real GDP?

increase as it increases, decrease as it decreases

how does the real interest rate affect consumption expenditure

increase in the real interest rate = decrease in consumption = increase in saving; decrease in the real interest rate = increase in consumption = decrease in saving

if aggregate planned expenditure exceeds real GDP, what happens to inventories?

unplanned inventories decrease so firms increase production

if aggregate planned expenditure is less than real GDP, what happens to inventories?

unplanned inventories increase so firms decrease production

autonomous consumption

when consumption expenditure is greater than disposable income; the amount of consumption expenditure that would occur in the short run even if people have no current income (from savings or loans)

natural rate hypothesis

when the inflation rate changes, the unemployment rate changes TEMPORARILY and eventually returns to the natural unemployment rate

anchor point on the phillips curve

where unemployment rate = natural unemployment and inflation rate = expected inflation rate

when consumption expenditure equals disposable income, saving is _____

zero