Chapter 11 1/19/2018. Basic Keynesian Model Expenditure and Tax Multipliers

Size: px
Start display at page:

Download "Chapter 11 1/19/2018. Basic Keynesian Model Expenditure and Tax Multipliers"

Transcription

1 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 is fixed how real GDP (Y) is determined when the price level is fixed multipliers - the expenditure and tax multiplier the relationship between aggregate expenditure and aggregate demand NOTE: Fixed price level is a key assumption of the basic Keynesian model. We consider variable price level in the aggregate demand/ aggregate supply model presented later. Short-run with Fixed Prices The Keynesian model describes the economy in the short run - when prices are fixed (rigid, sticky). Because the overall price level is fixed - Aggregate expenditure (demand) determines real GDP. Basic Keynesian model is called the Aggregate Expenditure model. 1

2 Short-run with Fixed Prices Recall: In the long run: K, L and technology determine full employment potential GDP Chapter 6. The basic Keynesian model explains why the economy may not be at full employment potential in the short-run. Short-run with Fixed Prices From the definition of real GDP, the components of aggregate expenditure [C, I, G (X-M)] sum to real GDP. Real GDP = C + I + G + X M (definition, Ch. 4) Real GDP = Y = Aggregate output(ch. 6) AE = C + I + G + X M (definition) At equilibrium: Aggregate output (Y) is equal to Aggregate Expenditure (AE): Y = AE. Y = C + I + G + X M Short-run with Fixed Prices In this basic model, two of the components of aggregate expenditure, household consumption (C) and imports (M), are influenced by Y (real GDP). 2

3 Household Consumption Plans Household Consumption and Saving Plans, i.e., what households plan to do. Household consumption expenditure is influenced by many factors but the most direct one is disposable income. Disposable income is aggregate income Y, minus net taxes, T. Net taxes = taxes + transfer payments We denote disposable income as YD. Disposable income is YD = Y T. Household Consumption Plans Disposable income, YD, is either spent on consumption C, or saved, S. That is, YD = C + S. Y T = C + S Y = C +S +T The relationship between consumption expenditure and disposable income, other things remaining the same, is the consumption function. The relationship between saving and disposable income, other things remaining the same, is the saving function. All points on the 45 0 line represent points where C = YD. When consumption expenditure exceeds disposable income, saving is negative (dissaving). When consumption expenditure is less than disposable income, there is saving. 3

4 Quarterly U.S. Consumption (C) and Disposable Income (Y-T), C = (Y-T) C R² = (Y-T) 11 Marginal Propensity to Consume and Marginal Propensity to Save MPC Figure 11.2(a) shows that the MPC is the slope of the consumption function. When disposable income increases by $2 trillion, consumption expenditure increases by $1.5 trillion. The MPC is Look at the Table on Figure

5 MPS MPS Figure 11.2(b) shows that the MPS is the slope of the saving function. When disposable income increases by $2 trillion, saving increases by $0.5 trillion. The MPS is MPC + MPS = 1 Fixed Prices and Expenditure Plans Consumption as a of Y Disposable income changes when either real GDP (Y) changes or net taxes (T) change. If T does not change, Y is the only influence on disposable income, so consumption expenditure is a function of Y (real GDP). We can put Y (not Y-T) on the horizontal axis, holding T fixed. 5

6 The Consumption with Y on the horizontal axis. Real Consumption Spending ($ Billions) 6,000 5,000 4,000 3,000 Consumption 2,000 1, ,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Y (Real income,$ billions) 19 A change in T will cause the Consumption to Shift. Real Consumption Spending ($ Billions) 6,000 5,000 Consumption function when net taxes drop 4,000 3,000 2,000 1,700 1, Consumption A decrease in T is caused by a reduction in taxes or an increase in transfer payments. 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Real income ($ billions) 20 Other factors that Shift the Consumption Wealth (W), which is accumulated household savings and investments Interest rates (r), which is the cost to borrow. Expectations about the future 21 6

7 Other factors that Shift the Consumption an increase in household wealth (W) a decrease in interest rates (r) households become more optimistic about the future ( ) Shift the consumption function upward 22 Upward Shift in the Consumption Real Consumption Spending ($ Billions) 6,000 5,000 W, r, T, 4,000 3,000 Consumption 2,000 1,000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Real income ($ billions) 23 Shift in the Consumption a decrease in household wealth (W) an increase in interest rates (r) household became more pessimistic about the future ( ) Shift the consumption function downward 24 7

8 Downward Shift in the Consumption Real Consumption Spending ($ Billions) 6,000 5,000 4,000 3,000 Consumption W, r, T, 2,000 1,000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Real income ($ billions) 25 Movement Along Versus a Shift 26 Import In the short run, U.S. imports are influenced primarily by U.S. real GDP. The marginal propensity to import (MPM) is the fraction of an increase in real GDP spent on imports. If an increase in real GDP of $1 trillion increases imports by $0.25 trillion, the marginal propensity to import is

9 Putting the Model Together Planned aggregate expenditure is planned consumption expenditure (C) plus planned investment (I) plus planned government expenditure (G) plus planned exports (X) minus planned imports (M). Planned consumption expenditure (C) and planned imports (M) are influenced by real GDP (Y). Short-run Model: Real GDP with a Fixed Price Level We assume in this simple short-run model planned investment (I) and planned government expenditure (G) and planned exports (X) are not influenced by real GDP (Y). I, G, and X are autonomous. But, in the loanable funds model I depends on? Planned Aggregate Expenditure Real GDP with a Fixed Price Level The relationship between aggregate planned expenditure and real GDP can be described by an aggregate expenditure schedule, which lists the level of aggregate expenditure planned at each level of real GDP. The relationship is also called the aggregate expenditure curve, which is a graph of the aggregate expenditure schedule. 9

10 Planned Aggregate Expenditure Schedule MPC = 0.7 and MPM = 0.2 Trillions of $ Real GDP (Y) C I G X M AE A B C D E F Amount produced Planned ( desired ) spending Short-run Model: Real GDP with a Fixed Price Level Figure 11.3 shows how the aggregate expenditure curve (AE) is built from its components. Short-run Model: Real GDP with a Fixed Price Level Consumption expenditure (C) and imports (M), which change as a result of a change in Y (real GDP), are called induced expenditure. Investment, government expenditure, and exports, which do not vary with GDP, are called autonomous expenditure. Consumption expenditure (C) and imports (M) can have an autonomous component constant term. Autonomous components for C are W, T, interest rate (r) and expectations. 10

11 Real GDP with a Fixed Price Level Actual Expenditure, Planned Expenditure, and Real GDP Planned aggregate expenditure may differ from actual aggregate expenditure because firms may experience unplanned changes in inventories which is included as part of actual expenditure. <= Important! Key concept here is unplanned changes in inventories. The 45 o Line A 45 line = translator line It allows us to measure any horizontal distance as a vertical distance instead Using a 45 Line to Translate Distances Dollars 1. Using a 45 line... A Consumption 3. into an equal vertical distance (BA). SLOPE = BA = 1 OB we can translate any horizontal distance (such as 0B)... B Dollars 11

12 Equilibrium: Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP. Real GDP is what is produced. Its measured along the horizontal axis and the 45 0 line. Equilibrium occurs at the point at which the AE curve crosses the 45 line in the upper graph. Equilibrium occurs when there are no unplanned changes in business inventories in part (b). Real GDP with a Fixed Price Level Convergence to Equilibrium From Below Equilibrium If aggregate planned expenditure exceeds real GDP (point B), there is an unplanned decrease in inventories. To restore inventories, firms hire workers and increase production. Firms adjust production quantity not price. Real GDP increases. Real GDP with a Fixed Price Level From Above Equilibrium If real GDP exceeds aggregate planned expenditure (point F), there is an unplanned increase in inventories. To reduce inventories, firms lay off workers and decrease production. Firms don t have a sale and lower prices. The cut production and real GDP decreases. 12

13 Real GDP with a Fixed Price Level Equilibrium If aggregate planned expenditure equals real GDP (the AE curve intersects the 45 line), there is no unplanned change in inventories. And firms maintain their current production. Real GDP remains constant. Equilibrium GDP Trillions of $ Real GDP(Y) Planned Aggregate Expenditure (AE) Unplanned Inventory Change A B C D E F Equilibrium GDP Trillions of $ Real GDP(Y) Planned Aggregate Expenditure (AE) Unplanned Inventory Change A B C D E F

EXPENDITURE MULTIPLIERS

EXPENDITURE 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 information

45 Line -The height of this measures disposable income

45 Line -The height of this measures disposable income Fixed Prices and Expenditure Plans -In the Keynesian model, all firms are like the grocery store: They set their prices and sell the quantities their customers are willing to buy -If they persistently

More information

Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a

Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a 10 1 Aggregate Expenditure & Income A dollar spent (expenditure) Translates directly into a dollar earned (income) Aggregate expenditure components Consumption, C - varies with income Investment, I - autonomous

More information

Part2 Multiple Choice Practice Qs

Part2 Multiple Choice Practice Qs Part2 Multiple Choice Practice Qs 1. The Keynesian cross shows: A) determination of equilibrium income and the interest rate in the short run. B) determination of equilibrium income and the interest rate

More information

AGGREGATE EXPENDITURE AND EQUILIBRIUM OUTPUT. Chapter 20

AGGREGATE 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 information

Chapter 10 3/19/2018. AGGREGATE SUPPLY AND AGGREGATE DEMAND (Part 1) Objectives. Aggregate Supply

Chapter 10 3/19/2018. AGGREGATE SUPPLY AND AGGREGATE DEMAND (Part 1) Objectives. Aggregate Supply Chapter 10 AGGREGATE SUPPLY AND AGGREGATE DEMAND (Part 1) Objectives Explain what determines aggregate supply in the long run and in the short run Explain what determines aggregate demand Explain how real

More information

Sticky Wages and Prices: Aggregate Expenditure and the Multiplier. 5Topic

Sticky 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 information

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Spring 2007

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Spring 2007 Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Spring 2007 Midterm Exam II Name Id # Instructions: There are two parts to this midterm. Part A consists of multiple choice questions. Please mark

More information

Aggregate Supply and Aggregate Demand

Aggregate 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 information

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

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.

More information

11 EXPENDITURE MULTIPLIERS* Chapt er. Key Concepts. Fixed Prices and Expenditure Plans1

11 EXPENDITURE MULTIPLIERS* Chapt er. Key Concepts. Fixed Prices and Expenditure Plans1 Chapt er 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

More information

ECO 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 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 information

ECO 2013: Macroeconomics Valencia Community College

ECO 2013: Macroeconomics Valencia Community College ECO 2013: Macroeconomics Valencia Community College Exam 3 Fall 2008 1. The most important determinant of consumer spending is: A. the level of household debt. B. consumer expectations. C. the stock of

More information

CHAPTER 23 - THE SHORT-RUN MACRO MODEL. PROBLEM SET 2. a.

CHAPTER 23 - THE SHORT-RUN MACRO MODEL. PROBLEM SET 2. a. CHAPTER 23 - THE SHORT-RUN MACRO MODEL PROBLEM SET 2. a. Real GDP Autonomous Consumption MPC x Disposable Income Consumption = Autonomous Consumption + (MPC x Disposable Income) $0 $30 $0 $30 $100 $30

More information

KING S UNIVERSITY COLLEGE. Economics 1022B (570 & 574) Review Questions for Chapter 27

KING S UNIVERSITY COLLEGE. Economics 1022B (570 & 574) Review Questions for Chapter 27 KING S UNIVERSITY COLLEGE Economics 1022B (570 & 574) G. Copplestone Review Questions for Chapter 27 Multiple Choice Questions: 1) If the marginal propensity to consume is 0.85, what change in consumption

More information

Introduction. Learning Objectives. Learning Objectives. Chapter 12. Consumption, Real GDP, and the Multiplier

Introduction. 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 information

Introduction. Learning Objectives. Learning Objectives. Economics Today Twelfth Edition. Chapter 12 Consumption, Income, and the Multiplier

Introduction. Learning Objectives. Learning Objectives. Economics Today Twelfth Edition. Chapter 12 Consumption, Income, and the Multiplier Roger LeRoy Miller Economics Today Twelfth Edition Chapter 12 Consumption, Income, and the Multiplier Introduction Consumption spending by households is the largest component of U.S. GDP. To the extent

More information

Chapter 12 Consumption, Real GDP, and the Multiplier

Chapter 12 Consumption, Real GDP, and the Multiplier Chapter 12 Consumption, Real GDP, and the Multiplier Learning Objectives After you have studied this chapter, you should be able to 1. define saving, savings, consumption, dissaving, autonomous consumption,

More information

Practice Test 2: Multiple Choice

Practice 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 information

Chapter 10 Aggregate Demand I CHAPTER 10 0

Chapter 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 information

EQ: What are the Assumptions of Keynesian Economic Theory?

EQ: What are the Assumptions of Keynesian Economic Theory? EQ: How is Keynesian Theory Different from Classical Theory? Classical Theory Supply-Focused (SRAS) Say s Law Economy is self-regulating Laissez-Faire Wages can go up or down Businesses will borrow & invest

More information

Disclaimer: This resource package is for studying purposes only EDUCATION

Disclaimer: 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 information

OVERVIEW. 1. This chapter presents a graphical approach to the determination of income. Two different graphical approaches are provided.

OVERVIEW. 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 information

Textbook Media Press. CH 27 Taylor: Principles of Economics 3e 1

Textbook Media Press. CH 27 Taylor: Principles of Economics 3e 1 CH 27 Taylor: Principles of Economics 3e 1 The Building Blocks of Keynesian Analysis Keynesian economics is based on two main ideas: a) aggregate demand is more likely than aggregate supply to be the primary

More information

Econ 102 Exam 2 Name ID Section Number

Econ 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 information

Archimedean Upper Conservatory Economics, October 2016

Archimedean 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 information

Questions and Answers

Questions and Answers Questions and Answers Ch 1 (continued) Q1: MCQ Aggregate Demand 1) The aggregate demand curve shows A) total expenditures at different levels of national income. B) the quantity of real GDP demanded at

More information

Aggregate Expenditure and Equilibrium Output. The Core of Macroeconomic Theory. Aggregate Output and Aggregate Income (Y)

Aggregate 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 information

Disposable income (in billions)

Disposable income (in billions) Section 4 version 2 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. An increase in the MPC: A. increases the multiplier. B. shifts the autonomous investment

More information

What Determines Aggregate Demand?

What Determines Aggregate Demand? What Determines Aggregate Demand? AS-AD model: emphasis on aggregate supply Now we are going to study a model that sheds more light on aggregate demand We will see how the two models are related Keynesian

More information

Aggregate Demand and the Powerful Consumer

Aggregate 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 information

Economics 102 Discussion Handout Week 14 Spring Aggregate Supply and Demand: Summary

Economics 102 Discussion Handout Week 14 Spring Aggregate Supply and Demand: Summary Economics 102 Discussion Handout Week 14 Spring 2018 Aggregate Supply and Demand: Summary The Aggregate Demand Curve The aggregate demand curve (AD) shows the relationship between the aggregate price level

More information

Short run Output and Expenditure

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 information

1. The most basic premise of the aggregate expenditures model is that:

1. The most basic premise of the aggregate expenditures model is that: 1. The most basic premise of the aggregate expenditures model is that: A. The total output produced in the economy depends directly on the level of total spending B. The level of employment in the economy

More information

Aggregate Demand. Sherif Khalifa. Sherif Khalifa () Aggregate Demand 1 / 36

Aggregate Demand. Sherif Khalifa. Sherif Khalifa () Aggregate Demand 1 / 36 Sherif Khalifa Sherif Khalifa () Aggregate Demand 1 / 36 The ISLM model allows us to build the Aggregate Demand curve. IS stands for investment and saving. The IS curve represents what is happening in

More information

Suggested Solutions to Assignment 3

Suggested 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 information

Aggregate Demand. Sherif Khalifa. Sherif Khalifa () Aggregate Demand 1 / 35

Aggregate Demand. Sherif Khalifa. Sherif Khalifa () Aggregate Demand 1 / 35 Sherif Khalifa Sherif Khalifa () Aggregate Demand 1 / 35 The ISLM model allows us to build the AD curve. IS stands for investment and saving. The IS curve represents what is happening in the market for

More information

Chapter 23. The Keynesian Framework. Learning Objectives. Learning Objectives (Cont.)

Chapter 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 information

Chapter 9 Chapter 10

Chapter 9 Chapter 10 Assignment 4 Last Name First Name Chapter 9 Chapter 10 1 a b c d 1 a b c d 2 a b c d 2 a b c d 3 a b c d 3 a b c d 4 a b c d 4 a b c d 5 a b c d 5 a b c d 6 a b c d 6 a b c d 7 a b c d 7 a b c d 8 a b

More information

Chapter 10 Aggregate Demand I

Chapter 10 Aggregate Demand I Chapter 10 In this chapter, We focus on the short run, and temporarily set aside the question of whether the economy has the resources to produce the output demanded. We examine the determination of r

More information

Table 9-2. Base Year (2006) 2013 Product Quantity Price Price Milk 50 $2 $3 Bread 100 $3 $3.50

Table 9-2. Base Year (2006) 2013 Product Quantity Price Price Milk 50 $2 $3 Bread 100 $3 $3.50 1) The advice to "keep searching, there are plenty of jobs around here for which you are qualified," would be most appropriate for which of the following types of unemployment? A) frictional unemployment

More information

EconS 102: Mid Term 3 Date: July 14th, Name: WSU ID:

EconS 102: Mid Term 3 Date: July 14th, Name: WSU ID: EconS 102: Mid Term 3 Date: July 14th, 2017 Instructions Write your name and WSU ID on the paper. All questions are worth 1 point. You have 40 minutes. This test is out of 15 points. There is a total of

More information

Homework Assignment #6. Due Tuesday, 11/28/06. Multiple Choice Questions:

Homework Assignment #6. Due Tuesday, 11/28/06. Multiple Choice Questions: Homework Assignment #6. Due Tuesday, 11/28/06 Multiple Choice Questions: 1. When the inflation rate is expected to be zero, Steve plans to lend money if the interest rate is at least 4 percent a year and

More information

MACROECONOMICS. Aggregate Demand I: Building the IS-LM Model. N. Gregory Mankiw. PowerPoint Slides by Ron Cronovich

MACROECONOMICS. 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 information

Econ 102 Exam 2 Name ID Section Number

Econ 102 Exam 2 Name ID Section Number Econ 102 Exam 2 Name ID Section Number 1. In a closed economy government spending was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion this year. Investment spending

More information

Econ 302 Fall Don t forget to download a copy of the Homework Cover Sheet. Mark the location where you handed in your work.

Econ 302 Fall Don t forget to download a copy of the Homework Cover Sheet. Mark the location where you handed in your work. Econ 302 Fall 2005 Don t forget to download a copy of the Homework Cover Sheet. Mark the location where you handed in your work. Homework #3; Chapter 9. This homework has three parts (A, B, C). Each part

More information

a) Calculate the value of government savings (Sg). Is the government running a budget deficit or a budget surplus? Show how you got your answer.

a) Calculate the value of government savings (Sg). Is the government running a budget deficit or a budget surplus? Show how you got your answer. Economics 102 Spring 2018 Answers to Homework #5 Due 5/3/2018 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework

More information

Royal School of Administration. Macroeconomics

Royal School of Administration. Macroeconomics Royal School of Administration Macroeconomics Chapter 9 By Group 6 1. Chum Chamreun 2. Sok Piseth 3. Kith Sothearith 4. Sreng Vichhay 5. Lay Piden 6. Chheang Damy IS-MP: A Short-Run Macroeconomic Model

More information

The Core of Macroeconomic Theory

The 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 information

Economics 102 Discussion Handout Week 13 Fall Introduction to Keynesian Model: Income and Expenditure. The Consumption Function

Economics 102 Discussion Handout Week 13 Fall Introduction to Keynesian Model: Income and Expenditure. The Consumption Function Economics 102 Discussion Handout Week 13 Fall 2017 Introduction to Keynesian Model: Income and Expenditure The Consumption Function The consumption function is an equation which describes how a household

More information

Economics 102 Discussion Handout Week 14 Spring Aggregate Supply and Demand: Summary

Economics 102 Discussion Handout Week 14 Spring Aggregate Supply and Demand: Summary Economics 102 Discussion Handout Week 14 Spring 2018 Aggregate Supply and Demand: Summary The Aggregate Demand Curve The aggregate demand curve (AD) shows the relationship between the aggregate price level

More information

AP Econ Practice Test Unit 5

AP 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 information

3) If the Canadian dollar exchange rate increases, the 3) A) internal value of the dollar falls.

3) If the Canadian dollar exchange rate increases, the 3) A) internal value of the dollar falls. Forty questions were automatically and randomly chosen by the computer from Chapters 19 through 2 6 of the Textʹs test bank - the instructor has not seen the questions chosen. Name: Random Q. Practice

More information

Chapter 11 Aggregate Demand I: Building the IS -LM Model

Chapter 11 Aggregate Demand I: Building the IS -LM Model Chapter 11 Aggregate Demand I: Building the IS -LM Model Modified by Yun Wang Eco 3203 Intermediate Macroeconomics Florida International University Summer 2017 2016 Worth Publishers, all rights reserved

More information

Chapter 11 Part 2 Basic Keynesian Model Expenditure and Tax Multipliers

Chapter 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 information

Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 5

Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 5 Economics 2 Spring 2017 Professor Christina Romer Professor David Romer SUGGESTED ANSWERS TO PROBLEM SET 5 1. The tool we use to analyze the determination of the normal real interest rate and normal investment

More information

IMPORTANT INFORMATION:

IMPORTANT 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 information

3 Macroeconomics SAMPLE QUESTIONS

3 Macroeconomics SAMPLE QUESTIONS MULTIPLE-CHOICE UNIT E07 Unit Summative Assessment Sample Multiple-Choice Questions Circle the letter of each correct answer. 1. Which of the following best describes aggregate supply? (A) The amount buyers

More information

Y = 71; :5Y (1 0:5)Y = 71; 500 0:5Y = 71; 500 Y = 143; 000. Note that you can get the same result if you use the formula

Y = 71; :5Y (1 0:5)Y = 71; 500 0:5Y = 71; 500 Y = 143; 000. Note that you can get the same result if you use the formula Basic Keynesian Model (Chapter 0): () C 4; 000 + 0:5(Y T ) since Y D Y T T 5; 000; I P 55; 000; G 20; 000 NX T otal Exports T otal Im ports 5; 000 20; 000 5; 000 AE C+I P +G+NX 4; 000+0:5(Y 5; 000)+55;

More information

Unit 3 Exam Review. Formulas to Know: Output gap = YA YP/YP (x 100) MPC = Consumption/ Yd. MPS = Savings/ Yd

Unit 3 Exam Review. Formulas to Know: Output gap = YA YP/YP (x 100) MPC = Consumption/ Yd. MPS = Savings/ Yd Unit 3 Exam Review Income and Expenditure 1. Explain relationship between MPC and the multiplier. Direct relationship, the higher the MPC, the greater the multiplier. 2. Understand the concept of autonomous

More information

ECON 120 -ESSENTIALS OF ECONOMICS

ECON 120 -ESSENTIALS OF ECONOMICS Name ECON 120 -ESSENTIALS OF ECONOMICS CH 24 THE GOVERNMENT AND FISCAL POLICY MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Fiscal policy refers

More information

Chapter 23. Aggregate Supply and Aggregate Demand in the Short Run. In this chapter you will learn to. The Demand Side of the Economy

Chapter 23. Aggregate Supply and Aggregate Demand in the Short Run. In this chapter you will learn to. The Demand Side of the Economy Chapter 23 Aggregate Supply and Aggregate Demand in the Short Run In this chapter you will learn to 1. Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium

More information

Learning Objectives. 1. Describe how the government budget surplus is related to national income.

Learning 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 information

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

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Final Exam Practice Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In an economy with no government or foreign sector, it is always true

More information

ECON 212: ELEMENTS OF ECONOMICS II Univ. Of Ghana, Legon Lecture 8: Aggregate Demand Aggregate Supply Dr. Priscilla T. Baffour

ECON 212: ELEMENTS OF ECONOMICS II Univ. Of Ghana, Legon Lecture 8: Aggregate Demand Aggregate Supply Dr. Priscilla T. Baffour ECON 212: ELEMENTS OF ECONOMICS II Univ. Of Ghana, Legon Lecture 8: Aggregate Demand Aggregate Supply Dr. Priscilla T. Baffour Sections 1. Relaxing a Temporal Assumption Price Level is no longer fixed.

More information

SAMPLE EXAM QUESTIONS FOR FALL 2018 ECON3310 MIDTERM 2

SAMPLE 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 information

Aggregate Consumption, Aggregate Demand, GDP and the Keynesian Cross 1 Instructional Primer 2

Aggregate Consumption, Aggregate Demand, GDP and the Keynesian Cross 1 Instructional Primer 2 Consumption, Demand, GDP and the Keynesian Cross 1 Instructional Primer 2 To understand the relationship between consumption, savings, expenditures, and GDP think of consumption as a function of income

More information

SOLUTION ECO 209Y MACROECONOMIC THEORY. Midterm Test #1. University of Toronto October 21, 2005 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS:

SOLUTION ECO 209Y MACROECONOMIC THEORY. Midterm Test #1. University of Toronto October 21, 2005 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: Department of Economics Prof. Gustavo Indart University of Toronto October 21, 2005 SOLUTION ECO 209Y MACROECONOMIC THEORY Midterm Test #1 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total

More information

ECON 1010 Principles of Macroeconomics Solutions to Exam #3. Section A: Multiple Choice Questions. (30 points; 2 pts each)

ECON 1010 Principles of Macroeconomics Solutions to Exam #3. Section A: Multiple Choice Questions. (30 points; 2 pts each) ECON 1010 Principles of Macroeconomics Solutions to Exam #3 Section A: Multiple Choice Questions. (30 points; 2 pts each) #1. In an open economy where government spending was $30 billion, consumption was

More information

ECON 102 Tutorial 3. TA: Iain Snoddy 18 May Vancouver School of Economics

ECON 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 information

Lecture 6 and 7: The Aggregate Expenditures Model Reference - Chapter 7

Lecture 6 and 7: The Aggregate Expenditures Model Reference - Chapter 7 Lecture 6 and 7: The Aggregate Expenditures Model Reference - Chapter 7 LEARNING OBJECTIVES 7.1 The factors that determine consumption expenditure and saving. 7.2 The factors that determine investment

More information

EC2105, Professor Laury EXAM 3, FORM A (4/10/02)

EC2105, 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 information

Economics 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 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 information

York University. Suggested Solutions

York University. Suggested Solutions York University Atkinson Faculty of Liberal and professional Studies Department of Economics ECON1010C Term Test 2 July 20, 2005 Instructor: Sharif F. Khan Suggested Solutions PART A 1. B 2. A 3. D 4.

More information

Assignment 2 (part 1) Deadline: September 30, 2004

Assignment 2 (part 1) Deadline: September 30, 2004 ECN 204 Introductory Macroeconomics Instructor: Sharif F. Khan Department of Economics Ryerson University Fall 2005 Assignment 2 (part 1) Deadline: September 30, 2004 Part A Multiple-Choice Questions [20

More information

Chapter 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. 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 information

2. THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME

2. 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 information

Shanghai Livingston American School Quarterly / Trimester Plan 2

Shanghai Livingston American School Quarterly / Trimester Plan 2 Shanghai Livingston American School Quarterly / Trimester Plan 2 Concept / Topic To Teach: Specific Objectives: Week 1 Week 2 Week 3 Week 4 Unit 3 Module 16 INCOME AND EXPENDITURES Comprehend the nature

More information

Questions and Answers

Questions 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 information

Aggregate Supply and Demand

Aggregate Supply and Demand Aggregate demand is the relationship between GDP and the price level. When only the price level changes, GDP changes and we move along the Aggregate Demand curve. The total amount of goods and services,

More information

UNIT II: THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME

UNIT 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 information

ECON 3312 Macroeconomics Exam 2 Spring 2017 Prof. Crowder

ECON 3312 Macroeconomics Exam 2 Spring 2017 Prof. Crowder ECON 3312 Macroeconomics Exam 2 Spring 2017 Prof. Crowder Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose the economy is currently

More information

a. Fill in the following table (you will need to expand it from the truncated form provided here). Round all your answers to the nearest hundredth.

a. Fill in the following table (you will need to expand it from the truncated form provided here). Round all your answers to the nearest hundredth. Economics 102 Summer 2015 Answers to Homework #4 Due Monday, July 13, 2015 Directions: The homework will be collected in a box before the lecture. Please place your name on top of the homework (legibly).

More information

macro macroeconomics Aggregate Demand I N. Gregory Mankiw CHAPTER TEN PowerPoint Slides by Ron Cronovich fifth edition

macro macroeconomics Aggregate Demand I N. Gregory Mankiw CHAPTER TEN PowerPoint Slides by Ron Cronovich fifth edition macro CHAPTER TEN Aggregate Demand I macroeconomics fifth edition N. Gregory Mankiw PowerPoint Slides by Ron Cronovich 2002 Worth Publishers, all rights reserved In this chapter you will learn the IS curve,

More information

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

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Problem Set Econ 2013: Chapter 10 :Basic Macroeconomic Relationships Name ID: MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The most important

More information

Aggregate Supply and Aggregate Demand

Aggregate Supply and Aggregate Demand Aggregate Supply and Aggregate Demand ECO 301: Money and Banking 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 the

More information

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

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 3312 Mcroeconomics Exam 2 Fall 2016 Prof. Crowder Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If output is currently 1000 below full

More information

Econ 102 Discussion Section 8 (Chapter 12, 13) March 20, 2015

Econ 102 Discussion Section 8 (Chapter 12, 13) March 20, 2015 Econ 102 Discussion Section 8 (Chapter 12, 13) March 20, 2015 The Multiplier and Shifting the Aggregate Expenditures Function The multiplier effect describes how changes in autonomous expenditures lead

More information

Review of the IS-LM model. Instructor: Dmytro Hryshko

Review of the IS-LM model. Instructor: Dmytro Hryshko Review of the IS-LM model Instructor: Dmytro Hryshko Readings Mankiw and Scarth. Fifth Canadian Edition. Chapter 10. Plan 1 Look closely at the AD and the variables that shift it. 2 Explore the tools policymakers

More information

E) price level and the total output that firms wish to produce and sell, as technology and input prices vary.

E) price level and the total output that firms wish to produce and sell, as technology and input prices vary. Exam Name 1) The economyʹs aggregate supply (AS) curve shows the relationship between the A) price level and the marginal propensity to consume (MPC). B) equilibrium real GDP and marginal cost. C) price

More information

Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 5

Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 5 Economics 2 Spring 2016 Professor Christina Romer Professor David Romer SUGGESTED ANSWERS TO PROBLEM SET 5 1. The left-hand diagram below shows the situation when there is a negotiated real wage,, that

More information

Part I: Matching (22 pts - 2 pts. each) 1. Investment

Part I: Matching (22 pts - 2 pts. each) 1. Investment 1 Part I: Matching (22 pts - 2 pts. each) 1. Investment 2. U.S. Net Exports 3. Gross National Income 4. Aggregate demand 5. The Simple Multiplier A. The sum of the incomes that all individuals in the economy

More information

chapter: >> Income and Expenditure WHAT YOU WILL LEARN IN THIS CHAPTER Krugman/Wells The Multiplier: An Informal Introduction

chapter: >> 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 information

Practice Test 1: Multiple Choice

Practice Test 1: Multiple Choice Practice Test 1: Multiple Choice 1. If aggregate planned expenditure exceeds real GDP A. actual inventories decrease below their target. B. firms are not maximizing their profits. C. planned consumption

More information

Macroeconomic Theory and Policy

Macroeconomic Theory and Policy 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 information

This 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 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 information

Objectives AGGREGATE DEMAND AND AGGREGATE SUPPLY

Objectives AGGREGATE DEMAND AND AGGREGATE SUPPLY AGGREGATE DEMAND 7 AND CHAPTER AGGREGATE SUPPLY Objectives After studying this chapter, you will able to Explain what determines aggregate supply Explain what determines aggregate demand Explain macroeconomic

More information

9. ISLM model. Introduction to Economic Fluctuations CHAPTER 9. slide 0

9. 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 information

EC and MIDTERM EXAM I. March 26, 2015

EC 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 information

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.

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. 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 information