lesson 8 HW

When planned aggregate expenditure is less than real​ GDP, as in the diagram to the​ right, what happens to​ firms' inventories?

Inventories accumulate if production is not scaled back.

Which AE category would buying a new house fall under?

Investment expenditure

Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or fluctuate less over the business cycle than it would in the absence of unemployment​ insurance?

Less likely; with unemployment​ insurance, current disposable income fluctuates less over the business cycle.

If you think of the aggregate expenditure function as a line on the​ 45°-line diagram, the slope would be

MPC

The relationship between the marginal propensity to consume​ (MPC) and the marginal propensity to save​ (MPS) can best be described as

MPC​ = 1 -MPS MPS​ = 1 -MPC MPC​ + MPS​ = 1

Which of the following is NOT included in the calculation of total government​ purchases?

Unemployment insurance benefits paid for by the federal government (not getting any goods/services for it, just providing benefits)

In the aggregate expenditure​ model, when is planned investment greater than actual​ investment?

When there is an unplanned decrease in inventories.

Which of the following causes saving to​ increase?

an increase in the interest rate (you are earning more interest/money by putting money into savings, so increased incentive so save and consume/spend less)

Aggregate​ expenditure, or the total amount of spending in the​ economy, equals

consumption spending plus PLANNED investment spending plus government purchases plus net exports.

The most important determinant of consumption is

current disposable income.

If the government raises the amount of​ taxes, holding everything else​ constant, then

disposable income will decrease.

When AE line is below the 45 degree line

economy is in recession

Inventories decreased by 3 million

means AE greater than GDP

Which of the following does the aggregate expenditure macroeconomic model seek to​ explain?

the business cycle (looks at changes in production and spending during expansion vs. recession)

MPC is the slope of

the consumption function and the AE function

The slope of the aggregate expenditure line equals

the slope of the consumption function

AE represents

the total amount of spending that occurs in an economy

The amount of the shortfall in planned aggregate expenditure is equal to

the vertical distance between AE and the 45 degree line at the level of potential real GDP

On the graph of the consumption​ function, the horizontal axis measures​ _______, while the vertical axis measures​ _______.

real national income or real​ GDP; real consumption spending

The negative growth of inventories indicates a period of

recession because demand was met by drawing down past inventories and production did not increase.

Why do firms keep inventories?

-Inventories allow firms a place to store excess production if they incorrectly estimate the quantity that consumers wish to purchase -Because customers do not purchase goods at regular​ intervals, inventories allow firms to have goods in stock when customers want to buy -Firms keep inventories in order to provide customers with a wider selection of choices

multiplier effect (ex. if investment spending increases by 100 million)

-the initial increase in income or GDP leads to a further increase in consumption and aggregate expenditure. -the final increase in GDP will be larger than

Would a larger multiplier lead to more severe recessions or less severe​ recessions?

A larger multiplier means that small changes in spending lead to large changes in​ GDP, and thus recessions would be more severe.

Which of the following is not an explanation for why firms keep​ inventories?

Because goods are produced in quantities that match the exact amounts consumers want to purchase at a given time.

If you think of the aggregate expenditure function as a line on the​ 45°-line diagram, the intercept would be

C(bar) + I (bar) + G (bar) + NX (bar) Just the AE = C + I + G + NX equation

Which of the following equalities is​ correct?

Disposable income is equal to national income minus net taxes.

How would an increase in the growth rate of GDP in the BRIC nations​ (Brazil, Russia,​ India, and​ China) affect U.S. net​ exports?

increase U.S. net exports by increasing exports to these countries.

When is the economy in a​ recession?

when the aggregate expenditure line intersects the 45 degree line at a level of GDP below potential GDP