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ECON 295 Chapter Notes - Chapter 21: Opportunity Cost, Retained Earnings, Real Interest Rate

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olivemammoth545
10 Mar 2013
School
McGill University
Department
Economics (Arts)
Course
ECON 295
Professor
Kenneth Ragan

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Document Summary

Desired aggregate expenditure (ae): the sum of desired or planned spending on domestic output by households, firms, governments, and foreigners. The national accounts divide actual gdp into its components: ca, ia, ga and nxa. Total desired expenditure is divided into the same categories: The sum is called desired aggregate expenditure: ae = c + i + g + nx. National income accounts measure actual expenditures in each of the four expenditure categories. National income theory deals with desired expenditures in each of these four categories. Autonomous expenditures do not depend on the level of national income. Induced expenditures do depend on the level of national income. Desired consumption expenditure: (in this chapter we are assuming that there are no taxes, no government, no trades with rest of the world) In the simplest theory, consumption is determined primarily by current disposable income (yd) On average, income is higher than consumption, and both have been getting higher, so saving has fallen.

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Related Questions

Question 1

Which of the following describes the relationship between the change in inventories and aggregate expenditure?

A.

Aggregate expenditure equals the change in inventories minus GDP.
B.

The change in inventories equals GDP divided by aggregate expenditures.
C.

Aggregate expenditures equals GDP divided by the change in inventories.
D.

Aggregate expenditures equals GDP minus the change in inventories.
E.

The change in inventories equals GDP multiplied by aggregate expenditure.

1 points

Question 2

Suppose the marginal propensity to consume is 0.80 and taxes decrease by $10 billion. Which of the following is true?

A.

Disposable income and consumption fall by $10 billion
B.

Disposable income and consumption rise by $10 billion
C.

Disposable income rises by $10 billion and consumption rises by $8 billion
D.

Disposable income falls by $10 billion and consumption falls by $8 billion
E.

Disposable income rises by $10 billion and consumption falls by $8 billion

1 points

Question 3

If aggregate expenditure at a particular level of income is less than output,

A.

output will increase
B.

output will decrease
C.

output will remain the same
D.

output will rise slightly and then level off
E.

we cannot determine what will happen to output

1 points

Question 4

The consumption function

A.

illustrates the relationship between real disposable income and real consumption spending
B.

illustrates the relationship between the price level and real consumption spending
C.

is the relationship between productivity and real consumption spending
D.

shows how real consumption increases when real disposable income decreases
E.

illustrates the relationship between real consumption spending and employment

1 points

Question 5

The focus of the short-run macro model is on the role of

A.

spending in explaining economic fluctuations
B.

labor in explaining economic fluctuations
C.

financial markets in explaining economic fluctuations
D.

output in explaining economic fluctuations
E.

resources in explaining economic fluctuations.

1 points

Question 6

If the output level is such that the aggregate expenditure line lies below the 45-degree line, which of the following is true?

A.

Aggregate expenditure is greater than output, so inventories will increase and output will be raised.
B.

Aggregate expenditure is greater than output, so inventories will decrease and output will be increased.
C.

Aggregate expenditure is less than output, so inventories will decrease and output will be raised.
D.

Aggregate expenditure is less than output, so inventories will increase and output will be lowered.
E.

Aggregate expenditure is greater than output, so inventories will increase and output will be lowered.

1 points

Question 7

If the marginal propensity to consume is 0.7, the expenditure multiplier is

A.

7.0
B.

0.7
C.

3.0
D.

3.3
E.

not determinable without additional information.

1 points

Question 8

Aggregate expenditure is the sum of

A.

all types of spending by households and firms
B.

spending and savings by households
C.

spending by households and governments on final goods and services
D.

spending by households, government, firms, and foreigners on final goods and services
E.

all spending and saving by households, firms, and governments

1 points

Question 9

If the marginal propensity to consume is 0.5 and disposable income increases by $10,000, by how much will consumption spending increase?

A.

$10,000
B.

$500
C.

$50
D.

$5,000
E.

$9,524

1 points

Question 10

When real consumption expenditure is plotted against real disposable income the resulting relationship is

A.

very weak.
B.

virtually flat .
C.

positive and very close to linear.
D.

negative and very close to linear.

Consider a small open economy in which aggregate expenditures, AE, is the sum of consumption spending by households, investment spending by firms, government expenditures and net exports. You may assume that net exports are independent of real GDP and taxes are lump‐sum. The numbers in the table below are in billions.

Real GDP Consumption Investment Gov't Expend. Net Exports Taxes Aggregate Expenditures
1000 1430 120 50 -100 160 A
2000 B 120 50 -100 160 2250
3000 2930 120 50 -100 160 3000
4000 3680 120 50 -100 160 3750
5000 4430 120 50 -100 160 4500

a. (4 pts) For the table below, calculate the missing values, A and B. b. (2 pts) From the table above, what kind of situation is the country in with regards to the trade balance (i.e. do we have a trade surplus or deficit)? What kind of situation is the country in with regards to the domestic balance (i.e. is the government running a deficit or surplus)? c. (4 pts) Use the table above to calculate the slope of the AE curve. [Hint: Recall that the slope of the AE curve is the additional increase in aggregate expenditures arising from an increase in GDP.] d. (4 pts) Recall that the Aggregate Expenditure function is written as: AE = AE0 + (slope of AE) *Y where AE0 is Autonomous Expenditures. Use the table in part (a) and your answer to part (c) above to calculate Autonomous Expenditure AE0. [Hint: Calculate induced expenditures for any given level of GDP, and use your answer to figure out AE0] e. (2 pts) In the table above, what is the value of real GDP in equilibrium? f. (4 pts) Suppose that the government decides to spend 500 billion more. By calculating the multiplier (or any other way), calculate the value of the new equilibrium value of real GDP!

10.

The long-run aggregate supply curve (LRAS) is Y = Yf, which depends on the amounts of resources and the level of technology innovation. If a country has more resources and better technology, which of the following is true?

A. The LRAS curve will shift to the right.

B. The SRAS will shift to the right.

C. The SRAS will shift to the left.

D. Only A and B.

E. Only A and C.

11.

Suppose the wage rates of workers are based on the expected price level. If there is an unexpected increase in AD, it will cause the actual price level to increase. Then workers should raise their expected price level and negotiate a higher wage rate. Then which of the following is most likely to be true when the expected price increases?

A. The SRAS curve will shift rightward.

B. The SRAS curve will shift leftward.

C. The LRAS curve will shift leftward.

D. Only A and C.

E. Only B and C.

12.

Suppose the economy is in the long-run equilibrium, i.e., Y = Yf, and there is an unexpected decrease in AD. Assume that Yf is fixed, then which of the following is most likely to be true?

A. The SRAS curve will shift to the right toward the new long-run equilibrium.

B. The SRAS curve will shift to the left toward the new long-run equilibrium.

C. In the new long-run equilibrium, price level will be higher.

D. Only A and C.

E. Only B and C.

13.

The short-run (SR) equilibrium is the intersection between AD and SRAS, and long-run (LR) equilibrium is the intersection between AD and LRAS. Every LR equilibrium is a SR equilibrium, but a SR equilibrium is not always the LR equilibrium. If an economy is operating at a SR equilibrium where Y > Yf, which of the following will occur in the process toward the new LR equilibrium when the economy corrects itself?

A. Price increases.

B. Real GDP decreases.

C. Unemployment rate falls.

D. Only A and B.

E. Only B and C.

14.

From the Keynesians, Y = C + I + G + NX can be transformed into a theoretical model. In particular, assume that the consumption C = A + mpc (Y-T), where A is a constant, mpc is the marginal propensity to consume, Y is national income and T is income taxes. Suppose in the goods market equilibrium, aggregate expenditure = national income such that the two Y's will be the same from Y = A + mpc (Y-T) + I + G+ NX. . Suppose C = 400 + 0.75(Y – T). G = 100, I = 100, T = 100, and NX = 150, what is the Y in the goods market equilibrium? (All of the variables are in terms of million dollars)

$ million
Please enter a whole number, with no decimal point.

15.

Continue to assume that C = 400 + 0.75 (Y - 100), I = 100, and NX = 150. But the government now increases spending from 100 to 200, how much is the new Y in the goods market equilibrium?

$ million
Please enter a whole number, with no decimal point.

16.

Continue to assume that C = 400 + 0.75 (Y - 100). Then which of the following is true?

A. The government spending multiplier = 4.

B. The tax multiplier = 3.

C. If the government increases spending by $50 million, and at the same time increases taxes by $50 milion to balance the budget, AD will shift to the right by $50 million.

D. Only A and C.

E. Only B and C.

17.

Suppose the federal government needs to balance the budget, which means that when the government spending increases, taxes must increase equally. In this case, government spending multiplier is called the balanced-budget multiplier, defined as the increase in real GDP/increase in government spending. By following the example from the previous question, how mcuh is the balanced-budget multiplier?


Please enter a whole number, with no decimal point.