# Micro / Macro Economics. Module 7. Classical Keynesian Economics. Classical Keynesian Economics. Aggregate Expenditure The same as Aggregate Demand

Save this PDF as:

Size: px
Start display at page:

Download "Micro / Macro Economics. Module 7. Classical Keynesian Economics. Classical Keynesian Economics. Aggregate Expenditure The same as Aggregate Demand"

## Transcription

1 Micro / Macro Economics Module 7 Classical Keynesian Economics EM1 1 Classical Keynesian Economics Aggregate Expenditure The same as Aggregate Demand Components of AE include: Consumption 55% Investment 20% Government Spending 22% Net Exports 3% EM1 2 Classical Keynesian Economics Consumption has two components Autonomous Not dependent on income Subsistence living The amount of spending if your income is zero Induced determined by Based on Disposable income, Expected future income, age and Interest rate 3 1

2 45 degree line Spending Disposable Income Assumptions: The total of what an economy earns = its total spending. We can go into debt in the short run but not the long run. The 45 degree line shows combinations where income = spending Consumption Function 160 Autonomous consumption = 160 Disposable Income Induced consumption is represented by the slope of the consumption function (MPC) If the MPC = 0.80, then for every dollar we earn, we spend \$ degree line Consumption Function Equilibrium C = Y Disposable Income The horizontal axis is Disposable Income and the vertical axis is expenditures The consumption function is the sum of autonomous and planned consumption The slope of C = Marginal Propensity to Consume (MPC), and is less than 1 6 2

3 45 degree line Y > C Consumption Function Equilibrium C = Y C > Y Disposable Income At any level of income below equilibrium, there is negative savings At income levels above equilibrium there is unplanned savings MPC + MPSave = 1 EM1 7 C1 C A change in disposable income Causes a movement along the C function A change in interest rates, future Expectations, world economies etc causes a shift of C to C1 8 Disposable Income = Income Taxes Y d = (1- t) * Y t = tax rate Marginal Propensity to consume out of real GDP = (1- t) * MPC Marginal Propensity to Spend = (1- t) * MPC MPImport EM1 9 3

4 Calculation t = 0.3 MPI = 0.2 MPC = 0.8 If \$100 falls from the sky and into the economy then Y d will increase by (1-0.3) * 100 = \$70 Consumption Spending will increase by \$70 * 0.8 = \$56 Domestic Spending will increase by \$56 20 = \$36 ***(Slope of C) *** Verification: Domestic Spending 36 Taxes 30 Imports 20 Savings (100 * (1- t) * (1-MPC)) 14 \$100 EM1 10 Aggregate Expenditure C = f(real GDP) Since Aggregate Income = Y d + Taxes And GDP = Aggregate Income We can change the axis of our model as shown Consumption = function () 11 Investment = function (Interest rates, Expected inflation Expected Profits Depreciation) Investment includes business inventories and our purchases of durable goods (houses, cars etc.) Investment = f(interest rates) cp EM1 12 4

5 Investment = function (Interest rates, Expected inflation Expected Profits Depreciation) Investment includes business inventories and our purchases of durable goods (houses, cars etc.) Investment = f(interest rates) cp Investment is predominantly autonomous Investment decisions are made well before they are carried out Usually a result of long term strategy There is an induced component to Investment, but that is beyond the scope of this course EM1 13 Real Interest Rate Investment = Function (i) Real Investment As real interest rates change there is a movement along the Investment curve If profit expectations change there is a movement of the Investment curve, either to the left or to the right 14 Exports decisions from the rest of the world to buy Canadian products Exports = function (other countries GDP Canadian Prices Exchange rates) Imports decisions by Canadians to buy foreign products Imports = function (exchange rates Foreign Prices Canadian GDP) EM1 15 5

6 Imports Trade Surplus Trade Deficit Exports Exports are constant (determined by the economy of other countries) Imports are upwards sloping (determined by the Canadian economy) Trade surplus or deficit is the difference between imports from exports As Canadian GDP rises from 500 to 650, Canada goes from a trade surplus to a trade deficit (a paradox of wealth) 16 C + I + G + NX = AE Autonomous Consumption Slope = Marginal Propensity to Spend Domestically out of real Yd G is set by parliament and budgets and is considered autonomous Autonomous consumption is the consumption that an economy would spend if GDP or Yd is zero I + G + NX are considered autonomous Slope of the AE line = MPC * (1- t) MPIm 17 AE E The 45 degree line represents the points where Aggregate Expenditures = Aggregate Income At E there is balance in the economy and Y = GDP = AE EM1 18 6

7 AE E If GDP = 450, spending exceeds income and business inventories fall. As inventories fall, businesses increase output and GDP will rise to 500 EM1 19 AE 150 E At GDP = 650, income exceeds spending and there is unplanned savings. As businesses inventories start to build, businesses lay off employees and cut back production. GDP will fall to 500 EM1 20 The Multiplier page 555 Suppose that an element of AE increases by 10 The AE line will shift from AE1 To AE2 GDP will change also, but by more than 10 AE2 AE

8 Multiplier Illustration G increases by \$10 MPC = 0.8 I spend \$8.00 on goods and services. That \$8.00 * 0.8 = \$6.40 is spent on other goods and services Then 6.40 * 0.8 = 5.12 is spent Notice in these three rounds total spending = = \$29.52 EM1 22 GDP will change by K * change in AE Where K is the multiplier K = 1 / (1 MPSpend) or K = 1 / (1 slope of AE) So if MPS = 0.8 then the multiplier = 1 / 0.2 = 5 page 556 A 10 dollar shift in AE will increase GDP by 10 * 5 = 50 dollars EM1 23 GDP will change by K * change in AE Where K is the multiplier K = 1 / (1 MPSpend) or K = 1 / (1 slope of AE) Calculating K: t = 0.20 MPI = 0.15 MPC =.80 K = 1 = 1 = (0.8 * ( )) 0.15)

9 Fiscal Policy If the economy needs a boost, Government can increase spending If G increase by 20 and K = 4, then GDP will rise by 80 As GDP rises Employment rises Tax collection rises EI payments drop EM1 25 Government can also change taxes As taxes decrease, Yd increases and Spending increases Because some taxes come from or go to savings, the tax multiplier is different Tax Multiplier = - MPC 1-slope of AE (***** if Imports = 0 then slope of AE = MPC *****) Government Spending Multiplier = 1 / (1 slope of AE) EM1 26 Tax Multiplier = - MPC 1-slope of AE Government Spending Multiplier = 1 / (1 slope of AE) If Government raised taxes and used the taxes to fund a project the net effect is the Balanced Budget Multiplier BBM = 1 / (1 slope of AE ) + - MPC / (1 slope of AE) BBM = 1- MPC 1 slope of AE EM1 27 9

10 Government Tax Cuts page 589 E1 SAS E AD As Government cuts taxes, Savings, Consumption and Investment increase Increased C causes a shift of the AD Initial equilibrium is at E1 Government Tax Cuts page 589 E1 SAS E E2 AD As Government cuts taxes, Savings, Consumption and Investment increase Increased S & I increase the Supply curve (right shift) Increased C causes a shift of the AD Initial equilibrium is at E1 but after the tax cut the equilibrium is E2 Deriving Aggregate Demand from Aggregate Expenditure page 560 AE if Price level is The top graph shows AE and the bottom graph shows AD EM

11 Deriving Aggregate Demand from Aggregate Expenditure AE if Price level is 80 AE if Price level is AS the Price level decreases, the AE shifts upwards, causing a corresponding point on the AD AD EM1 31 Deriving Aggregate Demand from Aggregate Expenditure AE if Price level is 80 AE if Price level is 100 AE if Price level is 120 Real GDP As the price level increases, AE shifts downwards causing another point on the AD EM1 32 Deriving Aggregate Demand from Aggregate Expenditure AE if Price level is 80 AE if Price level is 100 AE if Price level is Real GDP AD All we do now is connect the dots to form the AD line. EM

12 Calculating Equilibrium GDP (mathematical method) Autonomous Consumption 50 Investment 10 Government Spending 30 Exports 15 Marginal Propensity to Consume 0.80 Marginal Propensity to Import 0.20 Marginal Tax Rate 0.30 Calculate the Marginal Propensity to Spend Domestically ( ( 1 MTR ) * MPC) MPImport = ( ( ) * 0.80 ) 0.20 = 0.7 * = = 0.36 EM1 34 Calculate Equilibrium GDP AE = C + I + G + NX = ( (Y tax) ) (15 0.2Y) = ( Y 0.3Y) Y = Y Y = Y since AE = GDP then Y = Y Y Y = Y = 105 so Y = 105 / 0.64 Y = 164 EM1 35 SAS AD Typical Recession Scenario Notice the flat SAS As AD expands, real GDP increases but the price level stays the same Notice that the SAS eventually does rise (at full employment) EM

13 SAS AD Typical Boom Scenario As AD rises, real GDP rises but so do prices, as the economy reaches full employment EM1 37 Full Employment GDP AE 1 Full Empl. GDP Deflationary Gap AE 1 represents a recessionary scenario resulting in a deflationary gap The gap is measured as the distance between the 45-degree line and the AE line, at full employment EM1 38 Fiscal Policy Deflationary Gap multiplier = change in G required Potential GDP = 600 Actual GDP (using AE1) = 500 Multiplier = 5 Then government should increase spending by Or.. Decrease taxes using the tax multiplier -MPC 1 slope of AE Or.. Monetary Policy: decrease interest rates which increases spending and investment EM

14 Full Employment GDP AE 2 Full Empl. GDP Inflationary Gap 600 AE 2 shows an inflationary model as a result of a boom The gap is measured as the vertical distance between the 45-degree line and the AE line, at full employment Since GDP cannot increase, Price levels go up Inflation! EM1 40 Review Questions 1. Autonomous consumption is 200 while for every \$1 increase in disposable income,.80 is spent on consumption. Taxes are a constant 25% and Govt spending is 300. Investment is 200. Exports are 100 and imports are 10% of real GDP. a. Calculate equilibrium real GDP. b. If the govt wants to increase GDP by 100, by how much must it increase its purchases? EM1 41 Review Questions 1. Autonomous consumption is 200 while for every \$1 increase in disposable income,.80 is spent on consumption. Taxes are a constant 25% and Govt spending is 300. Investment is 200. Exports are 100 and imports are 10% of real GDP. a. real GDP = C + I + G + NE = (Y Y) ( Y) = Y 0.1Y Y = Y so... Y = Y or 0.5Y = 800 Y = 800 / 0.5 b. If the govt wants to increase GDP by 100, it increases its purchases by 100 / multiplier or 100 / 2 EM

15 2. An economy has the following data relating to its AE. C = Y = 0. If GDP rises by 100, C rises by 60. I = 50. G = 80. EX = 50 and the MP to import = 0.1. a. Complete the following table. Y C I G EX IM b. What is the equilibrium GDP? c. Calculate the MP to consume domestically out of real disposable income. d. Calculate the autonomous expenditure multiplier. 43 e. If Investment rises by 50, what is the new equilibrium GDP. 2. An economy has the following data relating to its AE. C = Y = 0. If GDP rises by 100, C rises by 60. I = 50. G = 80. EX = 50 and the MP to import = 0.1. Y C I G EX IM ***** b. What is the equilibrium GDP? c. MP to consume domestically = = 0.5 d. Expenditure multiplier = 1 / = 2 e. If Investment rises by 50, what is the new equilibrium GDP. GDP will increase by 50 *

### 13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Chapter. Fixed Prices and Expenditure Plans. D) the aggregate price level is fixed and that aggregate

Chapter 13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Fixed Prices and Expenditure Plans Topic: Keynesian Model * 1) In the Keynesian model of aggregate expenditure, real GDP is determined by the A)

### Study Questions 8 (Keynesian Model) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Study Questions 8 (Keynesian Model) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the Keynesian model of aggregate expenditure, real GDP is

### Macroeconomics Instructor Miller Aggregate Expenditure Practice Problems

Macroeconomics Instructor Miller Aggregate Expenditure Practice Problems 1. The aggregate expenditure model focuses on the relationship between real spending and. A) short-run; real GDP B) short-run; inflation

### 10 EXPENDITURE MULTIPLIERS* Chapter. Key Concepts. The Consumption Function

Chapter 0 EXPENDITURE MULTIPLIERS* Key Concepts Fixed Prices and Expenditure Plans In the very short run, firms do not change their prices and they sell the amount that is demanded. As a result: The price

### These are some practice questions for CHAPTER 23. Each question should have a single answer. But be careful. There may be errors in the answer key!

These are some practice questions for CHAPTER 23. Each question should have a single answer. But be careful. There may be errors in the answer key! 67. Public saving is equal to a. net tax revenues minus

### Keynesian cross and multiplier

Keynesian cross and multiplier Giovanni Di Bartolomeo giovanni.dibartolomeo@uniroma1.it Note: These lecture notes are incomplete without having attended lectures Keynesian cross Giovanni Di Bartolomeo

### These are some practice questions for CHAPTER 22. Each question should have a single answer. But be careful. There may be errors in the answer key!

These are some practice questions for CHAPTER 22. Each question should have a single answer. But be careful. There may be errors in the answer key! 42. With respect to consumption, investment, government

### 1. If the MPS = 0.1, then the value of the multiplier equals: a. 5. b. 10. c. 9. d. 1.

1. If the MPS = 0.1, then the value of the multiplier equals: a. 5. b. 10. c. 9. d. 1. 2. The marginal propensity to consume (MPC) is equal to the change in: a. consumer spending divided by the change

### Chapter 21: The Simplest Short-Run Macro Model. Answers to Study Exercises

Chapter 21: The Simplest Short-Run Macro Model Answers to Study Exercises Question 1 a) C a + I a ( + G a + NX a in an open economy with government) b) C + I ( + G + NX in an open economy with government)

### 1 of 20 10/19/2013 1:07 PM

1 of 20 10/19/2013 1:07 PM According to Keynesian theory, which of the following is not true at each short-term macro equilibrium? The economy may or may not be at full employment. The aggregate demand

### The IS Curve. This lecture describes the relationship between aggregate output and the real interest rate when the goods market is in equilibrium.

The IS Curve This lecture describes the relationship between aggregate output and the real interest rate when the goods market is in equilibrium. Aggregate Demand: The Basics A. Aggregate demand is the

### 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Aggregate Supply

Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Aggregate Supply Topic: Aggregate Supply/Aggregate Demand Model 1) The aggregate supply/aggregate demand model is used to help understand all of the following

### 13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Chapter. Key Concepts

Chapter 3 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Key Concepts Fixed Prices and Expenditure Plans In the very short run, firms do not change their prices and they sell the amount that is demanded.

### 1. What is an investment schedule and how does it differ from an investment demand curve? LO1

Chapter 28 The Aggregate Expenditures Model QUESTIONS 1. What is an investment schedule and how does it differ from an investment demand curve? LO1 Answer: An investment schedule shows the level of investment

### 02 Elementary Keynesian Model

02 Elementary Keynesian Model HKAL ECONOMICS PAST PAPER MACRO SECTION A 1. 90(2) In a hypothetical closed economy, C = 50 + 0.8Y I = 20 Y = 10N where C = consumption expenditure, Y = national income I

### = C + I + G + NX ECON 302. Lecture 4: Aggregate Expenditures/Keynesian Model: Equilibrium in the Goods Market/Loanable Funds Market

Intermediate Macroeconomics Lecture 4: Introduction to the Goods Market Review of the Aggregate Expenditures model and the Keynesian Cross ECON 302 Professor Yamin Ahmad Components of Aggregate Demand

### Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions

Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services

### NATIONAL INCOME DETERMINATION

3/29/26 NATIONAL INCOME DETERMINATION National Income Determination Looks at how the level of real GDP is determined and how it fluctuates around the level of potential GDP. We consider two models of income

### ECON 1010 Principles of Macroeconomics Solutions to Exam #3. Section A: Multiple Choice Questions. (40 points; 2 pts each)

ECON 1010 Principles of Macroeconomics Solutions to Exam #3 Section A: Multiple Choice Questions. (40 points; 2 pts each) 1. Domestic savings and foreign savings are: a. sources of funds for investment

### CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

### The Short-Run Macro Model. The Short-Run Macro Model. The Short-Run Macro Model

The Short-Run Macro Model In the short run, spending depends on income, and income depends on spending. The Short-Run Macro Model Short-Run Macro Model A macroeconomic model that explains how changes in

### Government Budget and Fiscal Policy CHAPTER

Government Budget and Fiscal Policy 11 CHAPTER The National Budget The national budget is the annual statement of the government s expenditures and tax revenues. Fiscal policy is the use of the federal

### The answer is (a) describes the relation between desired consumption expenditures and the factors that determine it, like real disposable income.

1 Solution Set: Chapter 22 Chapter Review: 2. The consumption function The answer is (a) describes the relation between desired consumption expenditures and the factors that determine it, like real disposable

### Aggregate Expenditure

Aggregate Expenditure CHAPTER30 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Distinguish between autonomous expenditure and induced expenditure

### Output and Expenditure in the Short Run

Chapter 11 (23) Output and Expenditure in the Short Run Chapter Summary Chapter 10 examined the determinants of long-run economic growth. In the short run, however, the economy experiences fluctuations

### Aggregate Expenditure Multiplier

Aggregate Expenditure Multiplier Chapter CHAPTER CHECKLIST Explain how real GDP influences expenditure plans. Aggregate planned expenditure is planned consumption expenditure plus planned investment plus

### 2009 CHAPTER 11 Self Study Questions

CHAPTER 11 Self Study Questions 1) The aggregate supply/aggregate demand model is used to help understand all of the following except A) inflation. B) business cycle fluctuations. C) the aggregate value

### Learning Objectives. 1 Desired Aggregate Expenditure

Learning Objectives 1of 30 1. Differentiate between desired expenditure and actual expenditure. 2. Explain the determinants of desired consumption and desired investment expenditures. 3. Define equilibrium

### Lesson 7 - The Aggregate Expenditure Model

Lesson 7 - The Aggregate Expenditure Model Acknowledgement: Ed Sexton and Kerry Webb were the primary authors of the material contained in this lesson. Section : The Aggregate Expenditures Model Aggregate

### Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Sample Final Exam Name Id # Part B Instructions: Please answer in the space provided and circle your answer on the question paper as well.

### 3 Macroeconomics SAMPLE QUESTIONS

Sample Multiple-Choice Questions Circle the letter of each correct answer. 1. Which of the following best describes aggregate supply? (A) The amount buyers plan to spend on output (B) A schedule showing

### Miami Dade College ECO Principles of Macroeconomics Fall 2015 Practice Test #3

Miami Dade College ECO 2013.004 Principles of Macroeconomics Fall 2015 Practice Test #3 1. If disposable income is \$3,000 and saving is \$1,200, how much is the average propensity to consume? A) 0.4 B)

### Circular Flows Understanding the macroeconomy involves breaking it down into its separate parts.

EC 201 Lecture Notes 4 Page 1 of 1 ECON 201 - Macroeconomics Lecture Notes 4 Metropolitan State University Allen Bellas BB Chapter 7 Circular Flows, Consumption and Aggregate Demand Circular Flows Understanding

### Chapter 12. Aggregate Expenditure and Output in the Short Run

Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)

### Income and Expenditure

chapter 11 (27) Income and Expenditure Chapter Objectives Students will learn in this chapter: The nature of the multiplier and how initial changes in spending lead to further changes The meaning of the

### Practice Problems: Chapter 13 Fiscal Policy

Practice Problems: Chapter 13 Fiscal Policy 1. In the basic equation of national income accounting, the government directly controls and influences. A) G ; C and I B) T ; G and C C) C ; X and M D) I ;

### University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 26 AD & AS Use the figure below to answer the following questions. Figure 26.1.1

### Example 2. When David has no income, he spends \$500. If his income increases to \$2000, he spends \$1900. What is his consumption function?

The Consumption Function The consumption function is an equation describing how a household s level of consumption varies with its disposable income. In order to fully understand the consumption function,

### Answers to Text Questions and Problems in Chapter 8

Answers to Text Questions and Problems in Chapter 8 Answers to Review Questions 1. The key assumption is that, in the short run, firms meet demand at pre-set prices. The fact that firms produce to meet

### Pre-Test Chapter 8 ed17

Pre-Test Chapter 8 ed17 Multiple Choice Questions 1. The APC can be defined as the fraction of a: A. change in income that is not spent. B. change in income that is spent. C. specific level of total income

### b. Given this information, describe the government budget balance for this economy.

Economics 102 Summer 2015 Answers to Homework #5 Due Wednesday, July 15, 2015 Directions: The homework will be collected in a box before the lecture. Please place your name on top of the homework (legibly).

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Econ 111 Summer 2007 Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The classical dichotomy allows us to explore economic growth

### Introduction to Economics, ECON 100:11 & 13 Fiscal Policy

We have already briefly talked about Keynesian arguments for government intervention, where we found that Keynesian Economist believes that because prices are sticky, it may take a sufficient lag in time

### University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 27 Expenditure Multipliers 1) Disposable income is A) aggregate income minus transfer

### Economics 1012A Introduction to Macroeconomics Fall 2008 Dr. R. E. Mueller Second Midterm Examination October 17, 2008

Economics 1012A Introduction to Macroeconomics Fall 2008 Dr. R. E. Mueller Second Midterm Examination October 17, 2008 Answer all of the following questions by selecting the most appropriate answer on

### 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

### Miami Dade College ECO Principles of Macroeconomics - Spring 2016 Practice Test #3

Miami Dade College ECO 2013.005 Principles of Macroeconomics - Spring 2016 Practice Test #3 1. If the stock market collapses, consumption will: A) not be affected. B) increase because stocks can now be

### Economics 104B. Solutions to Homework Assignment #4

Economics 104B Solutions to Homework Assignment #4 Required Assignment #4 Textbook Questions * denotes graded questions Chapter 13 (p. 334): Problems 6*, 8* 6*. a. The consumption function is C = 1 + 0.9(Y

### Macro CH 30 sample questions

Class: Date: Macro CH 30 sample questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. During 2008, a country has consumption expenditures of \$3.0 trillion,

### Robert Ackerman Office Hours: 2:00-3:00PM T/Th Office: PA202 November 11, Economics 101

Robert Ackerman rkackerm@live.unc.edu Office Hours: 2:00-3:00PM T/Th Office: PA202 November 11, 2013 Economics 101 Today Writing Assignment #2 Circular Flow Income Determination Fiscal Policy Economics

### The Aggregate Demand- Aggregate Supply (AD-AS) Model

The AD-AS Model The Aggregate Demand- Aggregate Supply (AD-AS) Model Chapter 9 The AD-AS Model addresses two deficiencies of the AE Model: No explicit modeling of aggregate supply. Fixed price level. 2

### The Aggregate Expenditure Model

The Aggregate Expenditure Model 25 25.1 Simple Aggregate Expenditure Model 25.2 Finding Equilibrium in the Aggregate Expenditure Model 25.3 Adding Investment, Government Purchases, and Net Exports 25.4

### INTRODUCTION AGGREGATE DEMAND MACRO EQUILIBRIUM MACRO EQUILIBRIUM THE DESIRED ADJUSTMENT THE DESIRED ADJUSTMENT

Chapter 9 AGGREGATE DEMAND INTRODUCTION The Great Depression was a springboard for the Keynesian approach to economic policy. Keynes asked: What are the components of aggregate demand? What determines

### Name: Date: 2. The IS-LM model takes as exogenous. A) the price level and national income B) the price level C) national income D) the interest rate

Name: Date: 1. John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on: A) low levels of capital. B) an untrained labor force. C) inadequate

### 6 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

Chapter 6 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

### FISCAL POLICY* Chapter. Key Concepts

Chapter 11 FISCAL POLICY* Key Concepts The Federal Budget The federal budget is an annual statement of the government s expenditures and tax revenues. Using the federal budget to achieve macroeconomic

### ECONS PASCO {ECON 152}

ECONS PASCO {ECON 152} 1. Macroeconomics deals with a. the activities of individual units b. the behaviour of the electronics industry c. economic aggregates d. the behaviour of firms 2. The study of inflation

### EC2105, Professor Laury EXAM 2, FORM A (3/13/02)

EC2105, Professor Laury EXAM 2, FORM A (3/13/02) Print Your Name: ID Number: Multiple Choice (32 questions, 2.5 points each; 80 points total). Clearly indicate (by circling) the ONE BEST response to each

### * * * 8 NATIONAL INCOME. Unit 1 : National Income Analysis

8 NATIONAL INCOME Macro / Topic 8-1 / P. 1 Unit 1 : National Income Analysis I Concepts and Meaning ( Definition ) II Approaches and Formulae III Measurement of GNP IV Economic Analysis of GNP National

### The level of price and inflation Real GDP: the values of goods and services measured using a constant set of prices

Chapter 2: Key Macroeconomics Variables ECON2 (Spring 20) 2 & 4.3.20 (Tutorial ) National income accounting Gross domestic product (GDP): The market value of all final goods and services produced within

ANSWERS TO END-OF-CHAPTER QUESTIONS 9-1 Explain what relationships are shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment-demand curve, and (d) the investment schedule.

### Module 16 Worksheet. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

Name: Class: Date: Module 16 Worksheet Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The marginal propensity to consume is: A. increasing if the marginal

### The Keynesian Cross. A Fixed Price Level. The Simplest Keynesian-Cross Model: Autonomous Consumption Only

The Keynesian Cross Some instructors like to develop a more detailed macroeconomic model than is presented in the textbook. This supplemental material provides a concise description of the Keynesian-cross

### CHAPTER 9 Building the Aggregate Expenditures Model

CHAPTER 9 Building the Aggregate Expenditures Model Topic Question numbers 1. Consumption function/apc/mpc 1-42 2. Saving function/aps/mps 43-56 3. Shifts in consumption and saving functions 57-72 4 Graphs/tables:

### Keynesian Fiscal Policy Practice Test

Keynesian Fiscal Policy Practice Test Multiple Choice (13 marks) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Fiscal Policy - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1.

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapters 11 & 12 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The Keynesian model of aggregate expenditure describes the economy in A) both

### Aggregate Supply and Aggregate Demand

Aggregate Supply and Aggregate Demand Econ 120: Global Macroeconomics 1 1.1 Goals Goals Specific Goals Be able to explain GDP fluctuations when the price level is also flexible. Explain how real GDP and

### Macroeconomics: Aggregate Demand & Aggregate Supply

RGDP HOSP 2207 (Economics) Learning Centre Macroeconomics: Aggregate Demand & Aggregate Supply The level of real GDP attained when an economy is at full capacity is called the full capacity GDP or potential

### Chapter 12: Aggregate Expenditure and Output in the Short Run

Chapter 12: Aggregate Expenditure and Output in the Short Run Yulei Luo SEF of HKU March 4, 2013 Learning Objectives 1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure

### Using an appropriately labeled money market graph, show the effects of an open market purchase of government securities by the FED on :

Using an appropriately labeled money market graph, show the effects of an open market purchase of government securities by the FED on : The money supply Interest rates Nominal Interest rates i1 i2 Sm1

### Introduction to Macroeconomics 1012 Final Exam Spring 2013 Instructor: Elsie Sawatzky

Introduction to Macroeconomics 1012 Final Exam Spring 2013 Instructor: Elsie Sawatzky Name Time: 2 hours Marks: 80 Multiple choice questions 1 mark each and a choice of 2 out of 3 short answer question

### Questions. True/False and Explain

166 CHAPTER 11 (27) Questions True/False and Explain Aggregate Supply 11. At full employment, there is no unemployment. 12. Along the LAS curve, a rise in the price level and all resource prices increase

### FEEDBACK TUTORIAL LETTER

FEEDBACK TUTORIAL LETTER 2 ND SEMESTER 2016 ASSIGNMENT 1 INTERMEDIATE MICRO ECONOMICS IMA612S 1 ASSIGNMENT 1 SECTION A [20 MARKS], [20 marks, 2 marks per question] Please note that in order to have completed

### 2. With an MPS of.4, the MPC will be: A) 1.0 minus.4. B).4 minus 1.0. C) the reciprocal of the MPS. D).4. Answer: A

1. If Carol's disposable income increases from \$1,200 to \$1,700 and her level of saving increases from minus \$100 to a plus \$100, her marginal propensity to: A) save is three-fifths. B) consume is one-half.

### ECON 1010 Principles of Macroeconomics Final Exam

ECON 1010 Principles of Macroeconomics Final Exam 1. Expansionary monetary policy: Section A: Multiple Choice Questions. (120 points; 3 pts each) a. increases the money supply, interest rates, consumption,

### Aggregate Demand & Aggregate Supply

We have rationalized why Classical Economist believe that Governments have no role in the Economy. This segment of our Macroeconomic Analysis will rationalize why Keynesian Economist believes otherwise.

### Outline of model. Factors of production 1/23/2013. The production function: Y = F(K,L) ECON 3010 Intermediate Macroeconomics

ECON 3010 Intermediate Macroeconomics Chapter 3 National Income: Where It Comes From and Where It Goes Outline of model A closed economy, market-clearing model Supply side factors of production determination

### 13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* * Chapter Key Ideas. Outline

C h a p t e r 13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* * Chapter Key Ideas Outline Economic Amplifier or Shock Absorber? A. A voice can be a whisper or fill Central Park, depending on the amplification.

### Study Questions for Chapter 9 (Answer Sheet)

DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 M-W-F 13:00-13:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:00-17:00 Study

### QUESTION BANK MACROECONOMICS

QUESTION BANK MACROECONOMICS Prepared by the faculties of the Department of Economics, B.Com (Evening) Chapter 1 (National Income Accounting) Short answer type questions (2 marks) 1. What is the difference

### DETERMINATIONS OF INCOME & EMPLOYMENT

UNIT 8 DETERMINATIONS OF INCOME & EMPLOYMENT POINTS TO REMEMBER Aggregate demand refers to total demand for goods and services in the economy. AD represents the total expenditure on goods and services

### Lecture Recessions and Fiscal Policy

Lecture 5-1 5. Recessions and Fiscal Policy A change in planned autonomous spending (A p ) will cause a change in equilibrium income. Is such a multiplier expansion or contraction desirable or not? Yes,

### Aggregate Supply and Aggregate Demand

Aggregate Supply and Aggregate Demand Chapter CHAPTER CHECKLIST Define and explain the influences on aggregate supply. Aggregate supply is the output from all firms. Other things remaining the same, the

### 1. Firms react to unplanned inventory investment by increasing output.

Macro Exam 2 Self Test -- T/F questions Dr. McGahagan Fill in your answer (T/F) in the blank in front of the question. If false, provide a brief explanation of why it is false, and state what is true.

### Assignment 4. To answer each question correctly, you have to choose the best answer from the given four choices.

IBS 601 Introduction to International Economics Instructor: Sharif F. Khan Department of Economics Ryerson University Winter 2006 Assignment 4 Part A Multiple-Choice Questions To answer each question correctly,

Business Conditions Analysis Prof. Yamin Ahmad ECON 736 Sample Final Exam Name Id # Instructions: There are two parts to this midterm. Part A consists of multiple choice questions. Please mark the answers

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Suvey of Macroeconomics, MBA 641 Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Modern macroeconomics emerged from

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Blanchard Cp.3 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose an open economy is in equilibrium. Given this information, we know

### ECON 3312 Mcroeconomics Exam 2 Fall 2014 Prof. Crowder

ECON 3312 Mcroeconomics Exam 2 Fall 2014 Prof. Crowder Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) When people are holding money in excess

### AP Macroeconomics: Vocabulary. 1. Aggregate Spending (GDP): The sum of all spending from four sectors of the economy.

AP Macroeconomics: Vocabulary 1. Aggregate Spending (GDP): The sum of all spending from four sectors of the economy. GDP = C+I+G+Xn 2. Aggregate Income (AI) :The sum of all income earned by suppliers of

Chapter 29 AS-AD and the Business Cycle 29.1 Business-Cycle Definitions and Facts 1) The relationship between real GDP and potential GDP over the business cycle can be best summarized by which of the following

### Sample Questions. Name: Class: Date: Multiple Choice Identify the letter of the choice that best completes the statement or answers the question.

Name: Class: Date: Sample Questions Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. In Exhibit V-2, consumption spending is a. \$100 billion

### Introduction to Macroeconomics TOPIC 2: The Goods Market

TOPIC 2: The Goods Market Annaïg Morin CBS - Department of Economics August 2013 Goods market Road map: 1. Demand for goods 1.1. Components 1.1.1. Consumption 1.1.2. Investment 1.1.3. Government spending

### The Macroeconomy in the Long Run The Classical Model

PP556 Macroeconomic Questions The Macroeconomy in the ong Run The Classical Model what determines the economy s total output/income how the prices of the factors of production are determined how total

### Econ 103 Ch 4: Page 88 (page 490 in Economics Define GDP and distinguish between a final good and an intermediate good. Provide examples.

Econ 103 Ch 4: Page 88 (page 490 in Economics) 1. Define GDP and distinguish between a final good and an intermediate good. Provide examples. GDP is the market value of all the final goods and services

### ECON 3560/5040 Week 2. 1. What Determines the Total Production of Goods and Services

ECON 3560/5040 Week 2 NATIONAL INCOME 1. What Determines the Total Production of Goods and Services - Factors of production: the inputs used to produce goods and services (1) Capital (K) (2) Labor (L)

### a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis

a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis Determinants of AD: Aggregate demand is the total demand in the economy. It measures spending on goods and services by consumers, firms, the