The Goods Market and the Aggregate Expenditures Model
|
|
- Bryce Underwood
- 6 years ago
- Views:
Transcription
1 The Goods Market and the Aggregate Expenditures Model Chapter 8 The Historical Development of Modern Macroeconomics The Great Depression of the 1930s led to the development of macroeconomics and aggregate demand tools to deal with recessions. During the Depression, output fell by 30 percent and unemployment rose to 25 percent. 2 The Historical Development of Modern Macroeconomics Keynes is the author of The General Theory of Employment, Interest and Money, which provided the new framework for macroeconomic policy. Classical Economists The Classical economists' approach was laissez-faire (leave the market alone). They believed the market was self-adjusting. They concentrated on the long run and largely ignored the short run. 3 4 Classical Economics They used microeconomic supply and demand arguments to explain the Great Depression. Their solution to the high unemployment was to eliminate labour unions and government policies that kept wages too high. Classical Economics Classical economists opposed deficit spending, arguing that the money to create jobs had to be borrowed. This money would have financed private economic activity and jobs, so everything would cancel out (called crowding out). 5 6
2 The Historical Development of Modern Macroeconomics Before the Depression, the prominent ideology was laissez-faire -- keep the government out of the economy. The Essence of Keynesian Economics Keynes thought that the economy could get stuck in a rut as wages and price level adjusted to sudden decreases in expenditures. After the Depression, most people believed government should have a role in regulating the economy. 7 8 The Essence of Keynesian Economics According to Keynes: a decrease in spending job layoffs fall in consumer demand firms decrease production more job layoffs further fall in consumer demand, and so forth Equilibrium Income Fluctuates Income is not fixed at the economy's long-run potential income it fluctuates. For Keynes there was a difference between equilibrium income and potential income Equilibrium Income Fluctuates Equilibrium income the level toward which the economy gravitates in the short run because of the cumulative cycles of declining or increasing production. Potential income the level of income that the economy technically is capable of producing without generating accelerating inflation. Equilibrium Income Fluctuates Keynes felt that at certain times the economy needed help to reach its potential income. He believed that market forces would not work fast enough and would not be strong enough to get the economy out of a recession
3 The Paradox of Thrift Incomes would fall as people lost their jobs causing both consumption and saving to fall as well. The economy would reach a new low-level equilibrium which could be at an almost permanent recession. The Paradox of Thrift Paradox of thrift an increase in savings can lead to a decrease in expenditures, decreasing output and causing a recession The Aggregate Expenditures Model Using a few simplifying assumptions, economists can construct a model of the economy. The Aggregate Expenditures (AE) Model looks at how real income is determined in an economy. The Aggregate Expenditures Model The AE model assumes that the price level is fixed, and explores how an initial shift in expenditures changes equilibrium output. The AE model quantifies the effect of changes in aggregate expenditures on aggregate output Aggregate Production Aggregate production the total amount of goods and services produced in every industry in an economy. Production creates an equal amount of income. Aggregate Production Graphically, aggregate production in the AE model is represented by a 45 line through the origin At all points on this Aggregate Production Curve, income equals production. Thus, actual production and actual income are always equal
4 The Aggregate Production Curve Aggregate Expenditures Real production C Aggregate production (production = income) Aggregate expenditures the total amount of spending on final goods and services in the economy: $4, º A $4,000 Potential income Real income Consumption spending by households. Investment spending by business. Spending by government. Net foreign spending on Canadian goods the difference between Canadian exports and imports Autonomous and Induced Expenditures Autonomous expenditures are expenditures that are independent of income. Autonomous expenditures change because something other than income changes. Induced expenditures expenditures that change as income changes. Autonomous and Induced Expenditures Autonomous expenditures is the level of expenditures that would exist at zero income and they remain constant at all levels of income. Induced expenditures are those that change as income changes, but they rise by less than the change in income Expenditures Function The relationship between expenditures and income can be expressed more concisely as an expenditures function. An expenditures function is a representation of the relationship between aggregate expenditures and income. The Expenditures Function The relationship between aggregate expenditures and income can be expressed mathematically: AE = AE o + mpcy AE = aggregate expenditures AE o = autonomous expenditures mpc = marginal propensity to consume Y = income 23 24
5 The Marginal Propensity to Consume Marginal propensity to consume (mpc) the change in consumption that occurs with a change in income. The mpc is between 0 and 1 because individuals tend to save a portion of an increase in income. The Marginal Propensity to Consume The mpc is the fraction spent from an additional dollar of income or mpc is the ratio of a change in consumption (DC) to a change in income (D Y). change in consumption C mpc = = change in income Y Graphing the Expenditures Function Graphing the Expenditures Function The graphical representation of the expenditures function is called the aggregate expenditures curve. The slope of the expenditures function tells us how much expenditures change with a particular change in income. Real expenditures (AE) $12,200 10,000 8,000 6,000 5,000 4,000 2,000 1, º D AE = 2,000 D Y = 2,500 AE 2,000 slope = = Y 2,500 AE mpc = = 0.8 Y Aggregate production AE = 1, Y $5,000 $8,750 $11,250$14,000 Real income Shifts in the Expenditures Function The aggregate expenditure curve shifts when autonomous C, I, G, or (X IM) change. Autonomous Consumption expenditures respond to changes in factors other than a change in real income, for example: interest rates household wealth expectations of future conditions Shifts in the Expenditures Function Autonomous Investment is the most volatile component of GDP. It responds to changes in: interest rates capital goods prices consumer demand conditions expectations regarding future economic conditions 29 30
6 Shifts in the Expenditures Function Autonomous exports and imports depend on foreign and domestic incomes and relative prices. Autonomous Government expenditures may also change as policies change. Determining the Equilibrium Level of Aggregate Income At equilibrium, planned expenditures must equal production. Graphically, it is the income level at which AE equals AP Solving for Equilibrium Graphically Solving for Equilibrium Algebraically Real expenditures (AE) $14,000 12,200 10,000 8,000 5,000 2,600 1,000 0 E AE 0 = $1, $2,000 $5,000 $10,000 $14,000 Aggregate production Aggregate expenditures AE = 1, Y Real income In equilibrium, Y = AE. Substituting in for aggregate expenditures, we have Y = AE 0 + mpcy Solving for Equilibrium Algebraically The Multiplier Equation Now solve for equilibrium income: Y mpcy = AE 0 The multiplier equation tells us that income equals the multiplier times autonomous expenditures. Y = Multiplier X Autonomous expenditures Y (1 mpc) = AE 0 Y = [ 1/ (1 mpc) ] * AE
7 The Multiplier Equation The Multiplier Process The multiplier process amplifies changes in autonomous expenditures. What forces are operating to ensure that the income level we determined is actually the equilibrium income level? When aggregate production do not equal aggregate expenditures: Businesses change production levels, which changes income, which changes expenditures, which changes production, which changes income, which changes... etc The Multiplier Process The Multiplier Process The process ends when aggregate production equals aggregate expenditures. Firms are selling all they produce, so they have no reason to change their production levels. Real expenditures (AE) C, I, G, (X IM) $14,000 $13,200 10,000 6,000 B 1 B2 C A 1 A 2 Aggregate production Aggregate expenditures AE = 1, Y 2, $2,000 $5,000 $10,000 $14,000 Real income The Circular Flow Model and the Multiplier Process The circular flow model provides the intuition behind the multiplier process. The flow of expenditures equals the flow of income. The Circular Flow Model and the Multiplier Process Expenditures are injections into the circular flow. The mpc measures the percentage of expenditures that get injected back into the economy each round of the circular flow. But there are withdrawals
8 The Circular Flow Model and the Multiplier Process Economists use the term the marginal propensity of save (mps) to represent the percentage of income flow that is withdrawn from the economy for each round of the circular flow. The Circular Flow Model and the Multiplier Process By definition: mpc + mps = 1 Alternatively expressed: mps = 1 - mpc multiplier = 1/mps The Circular Flow Model and the Multiplier Process The AE Model in Action Aggregate income The AE model illustrates how a change in autonomous expenditures changes the equilibrium level of income. Households Firms Aggregate expenditures The Multiplier Model in Action Autonomous expenditures are determined outside the model and are not affected by changes in income. When autonomous expenditures shift, the multiplier process is called into play. The Steps of the Multiplier Process The income adjustment process is directly related to the multiplier. Any initial shock (a change in autonomous AE) is multiplied in the adjustment process
9 The Steps of the Multiplier Process The multiplier process repeats and repeats until a new equilibrium level is finally reached. Shifts in the Aggregate Expenditure Curve C, I $4,200 4,160 4,100 E 1 Aggregate production E 0 20 AE 0 = Y AE 1 = Y 4, E $100 0 $4,060 $4,160 Real income E 0 D AE A = $20 $20 $16 D AE A = $ D AE A = $ First Five Steps of Four Multipliers First Five Steps of Four Multipliers mpc = 0.5 mpc = 0.75 mpc = 0.8 mpc = Multiplier = 1/(1-0.5) = 2 Multiplier = 1/(1-0.75) = 4 Multiplier = 1/(1-0.8) = 5 Multiplier = 1/(1-0.9) = Examples of the Effect of Shifts in Aggregate Expenditures There are many reasons for shifts in autonomous expenditures: The Effect of Shifts in Aggregate Expenditures An understanding of these shifts can be enhanced by tying them to the formula: Natural disasters. Changes in investment caused by technological developments. Shifts in government expenditures. Large changes in the exchange rate. AE = C + I + G + X - IM 53 54
10 Upward Shift of AE Downward Shift of AE Real expenditures $4,210 Aggregate production AE 30 1 AE 0 Real expenditures $4,152 Aggregate production AE 0 30 AE 1 4,090 1, , $120 Y = = $4,090 $4,210 Real income [ AE 0] [ AE 0] = 120 4,062 1,412 1, $90 Y = = $4,062 $4,152 Real income [ AE 0] [ AE 0] = Real World Examples Canada in Japan in the 1990s. The 1930s depression. Canada in 2000 Consumer confidence rose substantially causing autonomous consumption expenditures to increase more than economists had predicted. While economists had expected the economy to grow slowly, it boomed Japan in the 1990s The 1930s Depression Aggregate income and production fell during the 1990s. A dramatic rise in the yen cut Japanese exports. Autonomous consumption decreased as consumers confidence fell Suppliers responded by laying off workers and cutting production. The 1929 stock market crash, which continued into 1930, threw the financial markets into chaos. This resulted in a downward shift of the AE curve as wealth decreased
11 The 1930s Depression Frightened business people decreased investment and laid off workers. Frightened consumers decreased autonomous consumption and increased savings, thereby increasing withdrawals from the system. Governments cut spending to balance their budgets, as tax revenue declined. The 1930s Depression Business people responded by decreasing output, which decreased income, starting a downward cycle, thereby confirming the fears of the businesspeople. The process continued until the economy settled at a low-level equilibrium, far below the potential level of income The 1930s Depression The process caused the paradox of thrift, whereby individuals attempting to save more, spent less, and caused income to decrease. They ended up saving not more, but less. AE Model Is Not a Complete Model The AE model determines income given autonomous expenditures. These autonomous expenditures, however, are determined by economic variables which are not in our simple model AE Model Is Not a Complete Model The AE model uses aggregate expenditures to determine equilibrium income. It does not explain production. It assumes firms can supply the output demanded. Model of Aggregate Demand Shifts may be simultaneous shifts in supply and demand that do not necessarily reflect suppliers responding to changes in demand. Expansion of this line of thought has led to the real business cycle theory of the economy
12 Model of Aggregate Demand Real business cycle theory of the economy changes in aggregate supply are the principle way for real income to change. Prices are Fixed The multiplier model assumes that the price level is fixed. In reality, the price level can change in response to changes in aggregate demand Does Not Include Expectations People's forward-looking expectations make the adjustment process much more complicated. Most people, however, act upon their expectations of the future. Business people may not automatically cut back production and lay-off workers if they think a fall in sales is temporary. Forward-Looking Expectations Complicate the Adjustment Process Rational expectations model captures the effect expectations have on individuals behaviour. Expectations can be self-fulfilling Consumption Behaviour Expanded AE Model People may base their spending on lifetime income, not yearly income. Permanent income hypothesis -- the hypothesis that expenditures are determined by permanent or lifetime income. We can increase the power of our AE model by adding more detail. For example, adding taxes to the model Changes consumption expenditures. Introduces government budget deficits and surpluses. Changes the multiplier
13 Expanded AE Model Expanded AE Model Adding income-induced imports Changes import spending. Changes net exports, and introduces trade surpluses and deficits. The marginal propensity to import (mpi) gives the increase in import spending from an additional $1 of disposable income. Disposable = after-tax Mpi lies between 0 and 1 Changes the multiplier The Goods Market and the Aggregate Expenditures Model End of Chapter 8
Short run Output and Expenditure
Short run Output and Expenditure Short-run Output and Expenditure The Learning Objectives in this presentation are covered in Chapter 19: Output and Expenditure in the Short Run LEARNING OBJECTIVES 1 To
More informationEconomics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Third Midterm Examination November 15, 2007
Economics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Third Midterm Examination November 15, 2007 Answer all of the following questions by selecting the most appropriate answer on
More informationECON 102 Tutorial 3. TA: Iain Snoddy 18 May Vancouver School of Economics
ECON 102 Tutorial 3 TA: Iain Snoddy 18 May 2015 Vancouver School of Economics Questions Questions 1-3 set-up Y C I G X M 1.00 1.00 0.5 0.7 0.45 0.15 2.00 1.65 0.5 0.7 0.45 0.30 3.00 2.30 0.5 0.7 0.45 0.45
More informationSticky Wages and Prices: Aggregate Expenditure and the Multiplier. 5Topic
Sticky Wages and Prices: Aggregate Expenditure and the Multiplier 5Topic Questioning the Classical Position and the Self-Regulating Economy John Maynard Keynes, an English economist, changed how many economists
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand. Lecture
The Influence of Monetary and Fiscal Policy on Aggregate Demand Lecture 10 28.4.2015 Previous Lecture Short Run Economic Fluctuations Short Run vs. Long Run The classical dichotomy and monetary neutrality
More informationFEEDBACK TUTORIAL LETTER
FEEDBACK TUTORIAL LETTER 2 ND SEMESTER 2018 ASSIGNMENT 1 INTERMEDIATE MACRO ECONOMICS IMA612S 1 Course Name: Course Code: Department: INTERMEDIATE MACROECONOMICS IMA612S ACCOUNTING, ECONOMICS AND FINANCE
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
The Influence of Monetary and Fiscal Policy on Aggregate Demand 34 Aggregate Demand Many factors influence aggregate demand besides monetary and fiscal policy. In particular, desired spending by households
More informationTWO VIEWS OF THE ECONOMY
TWO VIEWS OF THE ECONOMY Macroeconomics is the study of economics from an overall point of view. Instead of looking so much at individual people and businesses and their economic decisions, macroeconomics
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND
21 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND LEARNING OBJECTIVES: By the end of this chapter, students should understand: the theory of liquidity preference as a short-run theory
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND
20 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND LEARNING OBJECTIVES: By the end of this chapter, students should understand: the theory of liquidity preference as a short-run theory
More informationThe Core of Macroeconomic Theory
PART III The Core of Macroeconomic Theory 1 of 33 The level of GDP, the overall price level, and the level of employment three chief concerns of macroeconomists are influenced by events in three broadly
More informationUse the following to answer question 15: AE0 AE1. Real expenditures. Real income. Page 3
Chapter 10 1. An example of an autonomous consumption policy is a policy that A) lowers tax rates to stimulate additional consumer spending. B) makes credit more widely available to consumers in order
More informationAggregate Expenditure and Equilibrium Output. The Core of Macroeconomic Theory. Aggregate Output and Aggregate Income (Y)
C H A P T E R 8 Aggregate Expenditure and Equilibrium Output Prepared by: Fernando Quijano and Yvonn Quijano The Core of Macroeconomic Theory 2of 31 Aggregate Output and Aggregate Income (Y) Aggregate
More informationECO 209Y MACROECONOMIC THEORY AND POLICY LECTURE 3: AGGREGATE EXPENDITURE AND EQUILIBRIUM INCOME
ECO 209Y MACROECONOMIC THEORY AND POLICY LECTURE 3: AGGREGATE EXPENDITURE AND EQUILIBRIUM INCOME Gustavo Indart Slide 1 ASSUMPTIONS We will assume that: There is no depreciation There are no indirect taxes
More informationThe Aggregate Expenditures Model. A continuing look at Macroeconomics
The Aggregate Expenditures Model A continuing look at Macroeconomics The first macroeconomic model The Aggregate Expenditures Model What determines the demand for real domestic output (GDP) and how an
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
The Influence of Monetary and Fiscal Policy on Aggregate Demand Chapter 20 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be
More informationDisclaimer: This resource package is for studying purposes only EDUCATION
Disclaimer: This resource package is for studying purposes only EDUCATION Ch 26: Aggregate Demand and Aggregate Supply Aggregate Supply Purpose of aggregate supply: aggregate demand model is to explain
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
The Influence of Monetary and Fiscal Policy on Aggregate Demand Chapter 34 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand
Chapter 32 The Influence of Monetary and Fiscal Policy on Aggregate Demand Test B 1. Of the effects that help explain why the U.S. aggregate demand curve slopes downward the a. wealth effect is most important
More informationProblem Set #2. Intermediate Macroeconomics 101 Due 20/8/12
Problem Set #2 Intermediate Macroeconomics 101 Due 20/8/12 Question 1. (Ch3. Q9) The paradox of saving revisited You should be able to complete this question without doing any algebra, although you may
More informationIntroduction. Learning Objectives. Learning Objectives. Chapter 12. Consumption, Real GDP, and the Multiplier
Chapter 12 Consumption, Real GDP, and the Multiplier Introduction Investment spending by businesses is a key component of economic growth. Expenditures on information technology were once expected to provide
More informationOVERVIEW. 1. This chapter presents a graphical approach to the determination of income. Two different graphical approaches are provided.
24 KEYNESIAN CROSS OVERVIEW 1. This chapter presents a graphical approach to the determination of income. Two different graphical approaches are provided. 2. Initially, both the consumption function and
More informationChapter 14. Macroeconomic Theory: Classical and Keynesian Models. Copyright 2011 Pearson Addison-Wesley. All rights reserved.
Chapter 14 Macroeconomic Theory: Classical and Keynesian Models The Debate Over Long Run Adjustment: the Classical & Keynesian Models Classical Model: Economy is always selfadjusting; there is no need
More informationEXPENDITURE MULTIPLIERS
27 EXPENDITURE MULTIPLIERS After studying this chapter, you will be able to: Explain how expenditure plans are determined Explain how real GDP is determined at a fixed price level Explain the expenditure
More informationPractice Test 2: Multiple Choice
Practice Test 2: Multiple Choice 1. The expenditure multiplier equals A. 1/(slope of APE curve). B. APC-APS where APC is the average propensity to consume and APS is the average propensity to save. C.
More informationchapter: >> Income and Expenditure WHAT YOU WILL LEARN IN THIS CHAPTER Krugman/Wells The Multiplier: An Informal Introduction
chapter: 11 >> Income and Expenditure Krugman/Wells WHAT YOU WILL LEARN IN THIS CHAPTER The nature of the multiplier, which shows how initial changes in spending lead to further changes. The meaning of
More information2.2 Aggregate demand and aggregate supply
The business cycle Short-term fluctuations and long-term trend Explain, using a business cycle diagram, that economies typically tend to go through a cyclical pattern characterized by the phases of the
More informationArchimedean Upper Conservatory Economics, October 2016
Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The marginal propensity to consume is equal to: A. the proportion of consumer spending as a function of
More informationObjectives of Macroeconomics ECO403
Objectives of Macroeconomics ECO403 http//vustudents.ning.com Actual budget The amount spent by the Federal government (to purchase goods and services and for transfer payments) less the amount of tax
More informationFluctuations of Investment Durability Irregularity of Innovation Variability of Profits Variability of Expectations
Shifts in the Invest Demand Curve Acquisition, Maintenance and Operating Costs Business Taxes Technological Change Stock of Capital Goods on Hand Expectations Fluctuations of Investment Durability Irregularity
More informationEC202 Macroeconomics
EC202 Macroeconomics Koç University, Summer 2014 by Arhan Ertan Study Questions - 3 1. Suppose a government is able to permanently reduce its budget deficit. Use the Solow growth model of Chapter 9 to
More informationEconomics 1012 A : Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Second Midterm Examination October 19, 2007
Economics 1012 A : Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Second Midterm Examination October 19, 2007 ================================================================================
More informationChapter 4. Determination of Income and Employment 4.1 AGGREGATE DEMAND AND ITS COMPONENTS
Determination of Income and Employment Chapter 4 We have so far talked about the national income, price level, rate of interest etc. in an ad hoc manner without investigating the forces that govern their
More informationMacroeconomics, Spring 2007, Final Exam, several versions, Early May
Name: _ Days/Times Class Meets: Today s Date: Macroeconomics, Spring 2007, Final Exam, several versions, Early May Read these Instructions carefully! You must follow them exactly! I) On your Scantron card
More informationWhat is Macroeconomics?
Introduction ti to Macroeconomics MSc Induction Simon Hayley Simon.Hayley.1@city.ac.uk it What is Macroeconomics? Macroeconomics looks at the economy as a whole. It studies aggregate effects, such as:
More informationChapter 10 Aggregate Demand I CHAPTER 10 0
Chapter 10 Aggregate Demand I CHAPTER 10 0 1 CHAPTER 10 1 2 Learning Objectives Chapter 9 introduced the model of aggregate demand and aggregate supply. Long run (Classical Theory) prices flexible output
More informationSuggested Solutions to Assignment 3
ECON 1010C Principles of Macroeconomics Instructor: Sharif F. Khan Department of Economics Atkinson College York University Summer 2005 Suggested Solutions to Assignment 3 Part A Multiple-Choice Questions
More informationThis is Appendix B: Extensions of the Aggregate Expenditures Model, appendix 2 from the book Economics Principles (index.html) (v. 2.0).
This is Appendix B: Extensions of the Aggregate Expenditures Model, appendix 2 from the book Economics Principles (index.html) (v. 2.0). This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/
More informationTutorial letter 102/3/2018
ECS2602/102/3/2018 Tutorial letter 102/3/2018 Macroeconomics 2 ECS2602 Department of Economics Workbook: Activities for learning units 1 to 9 Define tomorrow 2 IMPORTANT VERBS As a student, you should
More informationEC2105, Professor Laury EXAM 3, FORM A (4/10/02)
EC2105, Professor Laury EXAM 3, FORM A (4/10/02) 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
More informationAggregate Supply and Aggregate Demand
Aggregate Supply and Aggregate Demand Econ 120: Global Macroeconomics 1 1.1 Goals Goals Specific Goals Define the expenditure multiplier and how to compute it. Explain how recessions and expansions can
More informationThe fixed money supply is represented by a vertical supply curve.
Chapter 20 The Influence of Monetary and Fiscal Policy on Aggregate Demand OUTLINE: 1. The theory of liquidity preference. 2. How monetary policy affects aggregate demand. 3. How fiscal policy affects
More informationEcon 102 Exam 2 Name ID Section Number
Econ 102 Exam 2 Name ID Section Number 1. Suppose investment spending increases by $50 billion and as a result the equilibrium income increases by $200 billion. The investment multiplier is: A) 10. B)
More informationThe Government and Fiscal Policy
The and Fiscal Policy 9 Nothing in macroeconomics or microeconomics arouses as much controversy as the role of government in the economy. In microeconomics, the active presence of government in regulating
More informationEcon 3 Practice Final Exam
Econ 3 Winter 2010 Econ 3 Practice Final Exam No books or notes of any kind are allowed. On problems requiring calculations, you will only get credit if you show your work. Part I: Longer Answers. Please
More informationI. Learning Objectives II. The Income-Consumption and Income-Saving Relationships
I. Learning Objectives In this chapter students will learn: A. How changes in income affect consumption (and saving). B. About factors other than income that can affect consumption. C. How changes in real
More information9. ISLM model. Introduction to Economic Fluctuations CHAPTER 9. slide 0
9. ISLM model slide 0 In this lecture, you will learn an introduction to business cycle and aggregate demand the IS curve, and its relation to the Keynesian cross the loanable funds model the LM curve,
More informationGovernment 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 national
More information2. THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME
Ph: 98851 25025/26 www.mastermindsindia.com 2. THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME Q.No.1. Define Keynes concepts of equilibrium aggregate Income and output in an economy. (A) The
More informationMACROECONOMICS. Major Components of GDP. Consumption. Real consumption as a share of GDP. In this chapter, look for the answers to these questions:
Major Components of GDP P R I N C I P L E S O F MACROECONOMICS F I F T H E D I T I O N N. G R E G O R Y M A N K I W PowerPoint Slides by Luiggi Donayre 2007 Thomson South-Western, all rights reserved In
More informationThe Aggregate Demand/Aggregate Supply Model
CHAPTER 27 The Aggregate Demand/Aggregate Supply Model The Theory of Economics... is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw
More informationGehrke: Macroeconomics Winter term 2012/13. Exercises
Gehrke: 320.120 Macroeconomics Winter term 2012/13 Questions #1 (National accounts) Exercises 1.1 What are the differences between the nominal gross domestic product and the real net national income? 1.2
More informationAP Econ Practice Test Unit 5
DO NOT WRITE ON THIS TEST! AP Econ Practice Test Unit 5 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The marginal propensity to consume is equal to:
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand P R I N C I P L E S O F. N. Gregory Mankiw. Introduction
C H A P T E R 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand P R I N C I P L E S O F Economics N. Gregory Mankiw Introduction This chapter focuses on the short-run effects of fiscal
More informationChapter 9 The IS LM FE Model: A General Framework for Macroeconomic Analysis
Chapter 9 The IS LM FE Model: A General Framework for Macroeconomic Analysis The main goal of Chapter 8 was to describe business cycles by presenting the business cycle facts. This and the following three
More informationIn this chapter, look for the answers to these questions
In this chapter, look for the answers to these questions How does the interest-rate effect help explain the slope of the aggregate-demand curve? How can the central bank use monetary policy to shift the
More informationFEEDBACK TUTORIAL LETTER
FEEDBACK TUTORIAL LETTER 2 nd SEMESTER 2017 ASSIGNMENT 1 INTERMEDIATE MACRO ECONOMICS IMA612S 1 FEEDBACK TUTORIAL LETTER ASSIGNMENT 1 SECTION A [20 marks] QUESTION 1 [20 marks, 2 marks each] Correct answer
More informationIMPORTANT INFORMATION:
Economics 1B ECS1601 Semester 1 Department of Economics IMPORTANT INFORMATION: This tutorial letter contains solutions to assignment 03 BARCODE SOLUTIONS TO ASSIGNMENT 03 QUESTIONS SEMESTER 1, 2017 3.1
More informationLesson 12 The Influence of Monetary and Fiscal Policy on Aggregate Demand
Lesson 12 The Influence of Monetary and Fiscal Policy on Aggregate Demand Henan University of Technology Sino-British College Transfer Abroad Undergraduate Programme 0 In this lesson, look for the answers
More informationCHAPTER 11: Fiscal Policy
CHAPTER 11: Fiscal Policy 1a. Unemployment is below its natural rate and inflation is an increasing problem, so that real output must be above its potential level, and the economy faces an inflationary
More informationMidterm #2, version A, given Spring 2002 Note question #50 is from Chapter 11, which students are not responsible for on Exam 2 - Summer 02.
Midterm #2, version A, given Spring 2002 Note question #50 is from Chapter 11, which students are not responsible for on Exam 2 - Summer 02. Answers (if you think you see an error, please contact me ASAP.
More informationDefinition 58 POTENTIAL GDP is the economy s long run growth trend for real GDP.
III GDP and the Business Cycle We now begin our discussion of business cycles, chapter. Definition 58 POTENTIAL GDP is the economy s long run growth trend for real GDP. Definition 59 The BUSINESS CYCLE
More informationChapter 11 1/19/2018. Basic Keynesian Model Expenditure and Tax Multipliers
Chapter 11 Basic Keynesian Model Expenditure and Tax Multipliers This chapter presents the basic Keynesian model and explains: how aggregate expenditure (C,I,G,X and M) is determined when the price level
More informationQuestion 5 : Franco Modigliani's answer to Simon Kuznets's puzzle regarding long-term constancy of the average propensity to consume is that : the ave
DIVISION OF MANAGEMENT UNIVERSITY OF TORONTO AT SCARBOROUGH ECMCO6H3 L01 Topics in Macroeconomic Theory Winter 2002 April 30, 2002 FINAL EXAMINATION PART A: Answer the followinq 20 multiple choice questions.
More informationCHAPTER TWENTY-SEVEN BASIC MACROECONOMIC RELATIONSHIPS
CHAPTER TWENTY-SEVEN BASIC MACROECONOMIC RELATIONSHIPS CHAPTER OVERVIEW Previous chapters identified macroeconomic issues of growth, business cycles, recession, and inflation. In this chapter, the authors
More informationAGGREGATE EXPENDITURE AND EQUILIBRIUM OUTPUT. Chapter 20
1 AGGREGATE EXPENDITURE AND EQUILIBRIUM OUTPUT Chapter 20 AGGREGATE EXPENDITURE AND EQUILIBRIUM OUTPUT The level of GDP, the overall price level, and the level of employment three chief concerns of macroeconomists
More informationCHAPTER 23 OUTPUT AND PRICES IN THE SHORT RUN
CHAPTER 23 OUTPUT AND PRICES IN THE SHORT RUN Expand model to make price level endogenous variable. LEARNING OBJECTIVES - Why exogenous change in price level shifts AE curve and changes equilibrium level
More informationCIE Economics A-level
CIE Economics A-level Topic 4: The Macroeconomy e) The circular flow of income Notes Closed and open economies A closed economy is entirely self-sufficient, so it has no need to import anything, and it
More informationIII. 9. IS LM: the basic framework to understand macro policy continued Text, ch 11
Objectives: To apply IS-LM analysis to understand the causes of short-run fluctuations in real GDP and the short-run impact of monetary and fiscal policies on the economy. To use the IS-LM model to analyse
More informationAnswers to Questions: Chapter 8
Answers to Questions in Textbook 1 Answers to Questions: Chapter 8 1. In microeconomics, the demand curve shows the various quantities of a specific product that a consumer wants at various prices for
More informationChapter 3-Keynesian Model 1.pdf
Lebanese American University From the SelectedWorks of Ghassan Dibeh Fall 2017 Chapter 3-Keynesian Model 1.pdf Ghassan Dibah Available at: https://works.bepress.com/ghassan_dibeh/125/ Chapter 3 The Keynesian
More informationPart IV: The Keynesian Revolution:
1 Part IV: The Keynesian Revolution: 1945-1970 Objectives for Chapter 13: Basic Keynesian Economics At the end of Chapter 13, you will be able to answer the following: 1. According to Keynes, consumption
More informationCosumnes River College Principles of Macroeconomics Problem Set 6 Due April 3, 2017
Spring 2017 Cosumnes River College Principles of Macroeconomics Problem Set 6 Due April 3, 2017 Name: Instructions: Write the answers clearly and concisely on these sheets in the spaces provided. Do not
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND. Chapter 34
1 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND Chapter 34 Importance of economic policy Economic policy refers to the actions of the government that have a direct impact on the macroeconomic
More informationMacroeconomics: Principles, Applications, and Tools
Macroeconomics: Principles, Applications, and Tools NINTH EDITION Chapter 11 The Income- Expenditure Model Learning Objectives 11.1 Discuss the income-expenditure model. 11.2 Identify the two key components
More informationCHAPTER 28: THE AGGREGATE EXPENDITURES MODEL
CHAPTER 28: THE AGGREGATE EXPENDITURES MODEL Introduction Now that you have a basic understanding of how changes in disposable income, investment, and decisions about consumption and saving affect real
More informationConsumption expenditure The five most important variables that determine the level of consumption are:
The aggregate expenditure model: A macroeconomic model that focuses on the relationship between total spending and real GDP, assuming the price level is constant. Macroeconomic equilibrium: AE = GDP Consumption
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Questions of this SAMPLE exam were randomly chosen and may NOT be representative of the difficulty or focus of the actual examination. The professor did NOT review these questions. MULTIPLE CHOICE. Choose
More informationSAMPLE EXAM QUESTIONS FOR FALL 2018 ECON3310 MIDTERM 2
SAMPLE EXAM QUESTIONS FOR FALL 2018 ECON3310 MIDTERM 2 Contents: Chs 5, 6, 8, 9, 10, 11 and 12. PART I. Short questions: 3 out of 4 (30% of total marks) 1. Assume that in a small open economy where full
More informationPrinciples of Macroeconomics December 17th, 2005 name: Final Exam (100 points)
EC132.02 Serge Kasyanenko Principles of Macroeconomics December 17th, 2005 name: Final Exam (100 points) This is a closed-book exam - you may not use your notes and textbooks. Calculators are not allowed.
More informationSOLUTION ECO 202Y - L5101 MACROECONOMIC THEORY. Term Test #1 LAST NAME FIRST NAME STUDENT NUMBER. University of Toronto June 18, 2002 INSTRUCTIONS:
Department of Economics Prof. Gustavo Indart University of Toronto June 18, 2002 SOLUTION ECO 202Y - L5101 MACROECONOMIC THEORY Term Test #1 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total
More informationMacroeconomics. Introduction to Economic Fluctuations. Zoltán Bartha, PhD Associate Professor. Andrea S. Gubik, PhD Associate Professor
Institute of Economic Theories - University of Miskolc Macroeconomics Introduction to Economic Fluctuations Zoltán Bartha, PhD Associate Professor Andrea S. Gubik, PhD Associate Professor Business cycle:
More informationChapter 23. The Keynesian Framework. Learning Objectives. Learning Objectives (Cont.)
Chapter 23 The Keynesian Framework Learning Objectives See the differences among saving, investment, desired saving, and desired investment and explain how these differences can generate short run fluctuations
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand. Premium PowerPoint Slides by Ron Cronovich
C H A P T E R 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 2009 South-Western, a part
More informationTOPIC 1: IS-LM MODEL...3 TOPIC 2: LABOUR MARKET...23 TOPIC 3: THE AD-AS MODEL...33 TOPIC 4: INFLATION AND UNEMPLOYMENT...41 TOPIC 5: MONETARY POLICY
TOPIC 1: IS-LM MODEL...3 TOPIC 2: LABOUR MARKET...23 TOPIC 3: THE AD-AS MODEL...33 TOPIC 4: INFLATION AND UNEMPLOYMENT...41 TOPIC 5: MONETARY POLICY AND THE RESERVE BANK OF AUSTRALIA...53 TOPIC 6: THE
More informationVII. Short-Run Economic Fluctuations
Macroeconomic Theory Lecture Notes VII. Short-Run Economic Fluctuations University of Miami December 1, 2017 1 Outline Business Cycle Facts IS-LM Model AD-AS Model 2 Outline Business Cycle Facts IS-LM
More informationLecture 22. Aggregate demand and aggregate supply
Lecture 22 Aggregate demand and aggregate supply By the end of this lecture, you should understand: three key facts about short-run economic fluctuations how the economy in the short run differs from the
More informationEC and MIDTERM EXAM I. March 26, 2015
EC102.03 and 102.05 Spring 2015 Instructions: MIDTERM EXAM I March 26, 2015 NAME: ID #: You have 80 minutes to complete the exam. There will be no extensions. The exam consists of 40 multiple choice questions.
More informationUNIT II: THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME
UNIT II: THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME LEARNING OUTCOMES At the end of this unit, you will be able to: Define Keynes concept of equilibrium aggregate income Describe the components
More informationLearning Objectives. 1. Describe how the government budget surplus is related to national income.
Learning Objectives 1of 28 1. Describe how the government budget surplus is related to national income. 2. Explain how net exports are related to national income. 3. Distinguish between the marginal propensity
More informationAggregate Demand and Economic Fluctuations
Outline Macroeconomic Theory and Policy Chapter 9 Aggregate Demand and Economic Fluctuations Section 1 Business Cycle Section 2 Macroeconomic Modeling and Aggregate Demand Section 3 Keynesian Model Aggregate
More informationMACROECONOMICS. Aggregate Demand I: Building the IS-LM Model. N. Gregory Mankiw. PowerPoint Slides by Ron Cronovich
11 : Building the IS-LM Model MACROECONOMICS N. Gregory Mankiw PowerPoint Slides by Ron Cronovich 2013 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: the IS curve and its relation
More informationI. The Money Market. A. Money Demand (M d ) Handout 9
University of California-Davis Economics 1B-Intro to Macro Handout 9 TA: Jason Lee Email: jawlee@ucdavis.edu In the last chapter we developed the aggregate demand/aggregate supply model and used it to
More informationWebnote 228. Aggregate demand (AD) U-tube. Item hl sl Must Know Must know very well! Here are the details of what you need to know.
Webnote 228 2.2 Aggregate demand and Big Questions: 1. What factors cause changes (shifts + movements) in AS and AD? 2. What can the AS/AD model show in the macro economy?. Draw + explain the 2 schools
More informationChapter 11 Part 2 Basic Keynesian Model Expenditure and Tax Multipliers
2/23/208 Chapter Part 2 Basic Keynesian Model Expenditure and Tax Multipliers What Happens When Things Change - When autonomous spending changes, the equilibrium level of real GDP changes. But the change
More informationAggregate Demand and the Powerful Consumer
Aggregate Demand and the Powerful Consumer Dr. Ashraf Samir Website: ashraffeps.yolasite.com Contents I) Introduction II) Factors Determining Actual GDP III) The Circular Flow of Spending, Production,
More informationFEEDBACK TUTORIAL LETTER ASSIGNMENT 2 INTERMEDIATE MACRO ECONOMICS IMA612S
FEEDBACK TUTORIAL LETTER 2 nd SEMESTER 2017 ASSIGNMENT 2 INTERMEDIATE MACRO ECONOMICS 1 ASSIGNMENT 2 SECTION A [20 marks] QUESTION 1 [20 marks, 2 marks each] For each of the following questions, select
More informationChapter 22. Adding Government and Trade to the Simple Macro Model. In this chapter you will learn to. Introducing Government. Government Purchases
Chapter 22 Adding Government and Trade to the Simple Macro Model In this chapter you will learn to 1. Describe the relationship between national income and government purchases and tax revenues. 2. Describe
More informationQuestions and Answers
Questions and Answers Chapter 1 Q1: MCQ Aggregate demand 1. The aggregate demand curve: A) is up-sloping because a higher price level is necessary to make production profitable as production costs rise.
More informationFETP/MPP8/Macroeconomics/Riedel. General Equilibrium in the Short Run II The IS-LM model
FETP/MPP8/Macroeconomics/iedel General Equilibrium in the Short un II The -LM model The -LM Model Like the AA-DD model, the -LM model is a general equilibrium model, which derives the conditions for simultaneous
More information