chap 6

• The equation for actual national income from the expenditure side is written​ as: GDP=Ca+Ia+Ga+Xa−IMa.
• The equation for desired aggregate expenditure is written​ as: AE=C+I+G+(X−IM).
• National income accounts measure actual expenditures in four broad categories.

  National income theory deals with desired expenditure in the same four categories.
• The equation for a simple consumption function is written as C​ = a + bY. The letter a represents the

  autonomous part of consumption. The letters bY represent the induced part of consumption. When graphing a consumption​ function, the vertical intercept is given by the letter a​, and the slope of the function is given by the letter b.
• In the simple macro model of this​ chapter, all investment is treated as autonomous ​expenditure, meaning that it is unaffected by changes in national income.
• The aggregate expenditure function in the simple macro model of this chapter is written as AE=a+bY​, and is graphed with desired aggregate expenditure on the vertical axis and actual national income on the horizontal axis.
• An example of an aggregate expenditure function is AE​ = ​$55 billion​ + 0.83Y. Autonomous expenditure is ​$55 billion and the marginal propensity to spend out of national income is 0. 83
• In the simple model in this​ chapter, the marginal propensity to spend is the same as the marginal propensity to consume because

  A.only consumption varies with aggregate income.

  B.savings equals consumption.

  C.consumption equals investment.

  Coorect answer is A.only consumption varies with aggregate income
• National income accounting is based on actual expenditures because

  A.for any level of income at which desired aggregate expenditure is less than actual​ income, there will be pressure for national income to fall.

  B.for any level of national income at which desired aggregate expenditure exceeds actual​ income, there will be pressure for actual national income to rise.

  C.national income is in equilibrium when desired aggregate expenditure equals actual national income.

  D.All of the above.

  
  

  Correct answer is D.All of the above
• If there were a sudden decrease in desired autonomous consumption​ expenditure, inventories would

  A.accumulate and firms would eventually increase output.

  B.be depleted and firms would eventually increase output.

  C.accumulate and firms would eventually reduce output.

  D.be depleted and firms would eventually reduce output.

  Correct answer is C.accumulate and firms would eventually reduce output.
• If desired consumption is 150 and MPc is .7 what is the C function

  C=150 + .7Yd
• APC = C/Yd and MPC= change in C/ change in Yd
• What is the slope of consumption function?

  MPC
• What is the slope of the savings function?

  MPS
• Consider a consumption function of the following​ form: C=40+​(0.8​)Yd. At what level of disposable income will desired savings be equal to​ zero?

  $200= 40/(1-0.8)
• At a certain level of actual national income where the desired level of expenditures will be greater than the level of actual output.​ 

  The inventories of the firms will be depleted over time. As a​ result, firms will increase the level of their output.
• At a certain level of actual national income, where the desired level of expenditures is less than the level of actual output.​

  The inventories of the firms will accumulate over time. As a​ result, firms will decrease the level of their output.
• If C=400+0.8 and Y=350.​

  1. AE=750+. 8.8Y
  2. Applying the equilibrium​ condition, Y=​AE, the equilibrium income that would set the actual national income to the desired aggregate expenditure can be calculated as ​$3750. ​
  3. The level of consumption and savings at the equilibrium level of income are ​$3400 and ​$350​, respectively. ​​Finally, the level of investment expenditures at the equilibrium level of income is equal to ​$350
• Consider the following information describing a closed economy with no government and where aggregate output is demand​ determined:

  1.the equilibrium condition is Y=C+I

  2.the marginal propensity to saveequals=0.30

  3.the autonomous part of C is ​$72

  4.investment is autonomous and is ​$30.

  At the equilibrium level of national​ income, desired consumption expenditure will be $310
• Consider the following information describing an economy with​ demand-determined output. There is no government or foreign trade.

  1.the equilibrium condition is Y=C+I

  2.the marginal propensity to saveequals0.20

  3.the autonomous part of C is ​$61

  4.investment is autonomous and equals ​$20

  
  

  The equilibrium level of national income is $405
• If actual national income is ​$200 billion and desired aggregate expenditure is ​$250 ​billion, inventories may begin to be depleted​, firms will increase the level of​ output, and national income will increase
• If households experience an increase in wealth that leads to an increase in desired​ consumption, the AE curve will shift upward. Equilibrium national income will increase to the level indicated by the intersection of the AE curve with the 45 degree line.
• When autonomous desired expenditure increases by​ $10 billion, national income will increase by more than​ $10 billion. The magnitude of the change in national income is measured by the multiplier
• The larger is the marginal propensity to​ spend, the larger is the multiplier. Where z is the marginal propensity to​ spend, the multiplier is equal to $1/(1-z)$
• ​"Revival of consumer confidence leads to increased​ spending."

  A.The consumption function shifts up and the investment function shifts​ down; hence, the AE function does not shift and equilibrium national income does not change.

  B.The consumption function shifts​ up, the AE function shiifts up and the equilibrium national income increases

  C.The saving function shifts​ down, the AE function shifts down, and equilibrium national income decreases

  Correct answer is B.The consumption function shifts​ up, the AE function shifts​ up, and equilibrium national income increases.
• ​"High mortgage rates discourage new house​ purchases."

  Assuming that housing construction falls when house sales​ fall,

  the investment function shifts​ down, the AE function shifts​ down, and the equilibrium level of national income decreases.
• ​"Concern over future leads to a reduction in​ inventories."

  The investment function shifts​ down, the AE function shifts​ down, and equilibrium national income falls.
• "Optimism about vaccine​ roll-out leads to surge in business​ investment."

  Taken by​ itself,

  the investment function shifts​ up, the AE function shifts​ up, and equilibrium national income increases.
• The​ "Paradox of​ Thrift" is a famous idea in macroeconomics. The basic idea is that if every household in the economy tries to increase its level of desired​ saving, the level of national income will fall and they will end up saving no more than they were initially.

  According to the Paradox of​ Thrift, attempts to change the level of saving will

  cause the aggregate consumption line and the aggregate expenditure line to shift down.
• AE=140+0.40Y

  The marginal propensity to spend is 0.4 and the simple multiplier is 1.67.
• AE=920+0.67Y

  The marginal propensity to spend is 0.67 and the simple multiplier is 3.03
• AE=5470+0.91Y

  The marginal propensity to spend is 0.91 and the simple multiplier is 11.11
• AE=100s+0.46Y

  The marginal propensity to spend is 0.46 and the simple multiplier is 1.85
• Explain why the simple multiplier is larger when z is​ larger, independent of the value of autonomous expenditure.

  As z becomes​ larger, the curve for the AE function becomes steeper. As this​ occurs, the increase in equilibrium income is larger than the increase in autonomous expenditure. So the simple multiplier is larger when z is larger.
• The autonomous consumption expenditures and autonomous investment expenditures in an economy are ​$200 and ​$400​, respectively. It is also observed that individuals spend 75​% of their additional income on consumption.

  Using the information provided​ above, the aggregate expenditure function for this economy​ is:

  AE=600 ​+ 0. 75Y
• AE​ = 600 ​+ 0. 75Y

  The simple multiplier for this economy can be calculated as 4. ​

  The value of the simple multiplier implies that a ​$200 increase in the autonomous investment expenditures would lead to a ​$800 increase in the equilibrium level of actual income.
• Which of the following will increase the simple​ multiplier?

  A.an increase in the marginal propensity to save

  B.an increase in the marginal propensity to consume

  C.a decrease in the marginal propensity to spend

  D.a decrease in the desired investment expenditures

  E.a decrease in the autonomous consumption

  Correct answer is B.an increase in the marginal propensity to consume
• Consider a simple macro model with a constant price level and​ demand-determined output. If the marginal propensity to spend in such a model is 0.58​, the simple multiplier is 2.38
• Suppose aggregate output is​ demand-determined. Suppose a decrease in autonomous investment expenditure of ​$31 million reduces equilibrium national income by ​$60 million. The marginal propensity to spend is equal to 0.48