Aggregate Expenditure and National Income Quiz

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Questions and Answers

What is the relationship between aggregate expenditure (AE) and national income at equilibrium?

AE is independent of Y

AE is greater than Y

AE is less than Y

AE equals Y (correct)

Which of the following represents the marginal propensity to consume (MPC) out of disposable income?

0.72

0.1

0.8 (correct)

0.9

What effect does an increase in government spending (G) have during a recessionary gap?

Increases national income (correct)

Reduces national income

Decreases government debt

Has no effect on national income

In the equation for aggregate expenditure, what does the term 'mY' represent?

Imports Signup and view all the answers

Which fiscal policy action is associated with contractionary measures?

Increasing taxes Signup and view all the answers

What does the balanced-budget multiplier refer to?

An equal increase in government spending and taxes Signup and view all the answers

In the context of the aggregate expenditure function, what does the term 'z' represent?

The slope of the aggregate expenditure function Signup and view all the answers

What is indicated by an unintended change in inventory levels?

An imbalance between planned and actual spending Signup and view all the answers

What role does the tax and transfer system play in the economy?

It reduces the value of the multiplier and acts as an automatic stabilizer. Signup and view all the answers

In the case of a recessionary gap, what is the expected shift in the Aggregate Demand (AD) curve?

Rightward shift Signup and view all the answers

Which of the following statements about the Paradox of Thrift is true?

Good for individuals can be detrimental to the overall economy. Signup and view all the answers

What is one of the practical limitations of discretionary fiscal policy?

Decision and execution lags can delay the multiplier effect. Signup and view all the answers

What is a likely outcome of temporary tax cuts for households?

Households are likely to save more during periods of temporary tax cuts. Signup and view all the answers

Which scenario illustrates a leftward shift in the Aggregate Demand curve?

A decrease in consumer confidence. Signup and view all the answers

How do policy changes that lower tax rates impact long-term economic growth?

They potentially lower public investment in important social services. Signup and view all the answers

What is the commonly accepted relationship between saving and GDP in the long run?

More saving is associated with more investment and thus higher GDP. Signup and view all the answers

What impact does an increase in government spending (incr.G) have on private sector asset formation?

It can potentially lower private sector asset formation. Signup and view all the answers

What is a possible long-term effect of increased government spending on economic growth?

Lower future rates of growth of potential output. Signup and view all the answers

In a scenario where taxes are reduced, what immediate effect on the economy is expected?

Stimulus to aggregate demand and increase in GDP. Signup and view all the answers

What is the relationship between investment and the real rate of interest?

Investment is negatively related to the real rate of interest. Signup and view all the answers

What does the Rule of 72 calculate?

The time required for an investment to double based on rate of return. Signup and view all the answers

In the context of national saving, which components are included in its calculation?

Private sector saving and public sector saving. Signup and view all the answers

What effect does an increase in national saving have on real interest rates?

It causes real interest rates to decrease. Signup and view all the answers

What is one spin-off benefit of rising average living standards?

Improved environmental protection concerns. Signup and view all the answers

What prediction is associated with the law of diminishing returns?

Adding additional units of labor will decrease the marginal product of labor. Signup and view all the answers

How does economic growth affect poverty alleviation?

It allows for easier redistribution in a growing economy. Signup and view all the answers

Which statement best describes the aggregate production function in neoclassical growth theory?

It represents a function of labor, capital, and human resources. Signup and view all the answers

What is one potential negative aspect of increased government spending in the economy?

It might lead to a decrease in overall economic efficiency. Signup and view all the answers

Which of the following statements is true regarding economic growth's impact on material living standards?

Even small differences in annual growth rates can have a cumulative effect. Signup and view all the answers

What is the relationship between saving and the interest rate?

Saving increases as the interest rate decreases. Signup and view all the answers

When national saving is equated with desired investment and net exports, what is the equilibrium condition?

National saving equals desired investment plus net exports. Signup and view all the answers

What does an increase in the demand for investment lead to?

An increase in the growth rate of GDP. Signup and view all the answers

What does money neutrality imply about the relationships in the economy?

Money supply changes do not affect real GDP. Signup and view all the answers

Which statement is consistent with the classical dichotomy?

Real and monetary effects can be analyzed separately. Signup and view all the answers

What effect does hysteresis have on potential output in the long run?

It can lower Y* due to skill deterioration in workers. Signup and view all the answers

Which perspective argues that monetary policy effectiveness varies with the slope of the ID curve?

Monetarists believe the ID curve is steep. Signup and view all the answers

What does the Aggregate Demand (AD) curve represent?

The relationship between real GDP and the price level where desired aggregate expenditure equals actual GDP. Signup and view all the answers

How do modern economists differ from classical economists regarding monetary impacts?

They believe real economic effects can coincide with monetary changes. Signup and view all the answers

What characterizes the short-run non-neutrality of money?

The extent of the AD curve shift influences output adjustments. Signup and view all the answers

Why is the AD curve negatively sloped?

A decrease in price increases real wealth, consumer investment, and AD. Signup and view all the answers

What is a key belief among Keynesians regarding monetary policy?

Monetary policy has limited effectiveness in the short run. Signup and view all the answers

What signifies a rightward shift in the Aggregate Demand curve?

Increased equilibrium GDP at a given price. Signup and view all the answers

What happens if the economy is expected to open an inflationary gap?

The central bank may implement contractionary monetary policy. Signup and view all the answers

What causes the Aggregate Supply (AS) curve to be positively sloped?

As output rises, firms face rising costs due to zero excess capacity and higher demand for inputs. Signup and view all the answers

What results in a leftward shift of the Aggregate Supply curve?

A decrease in the available labor force. Signup and view all the answers

What is a key characteristic of demand-determined output?

Firms will produce all that is demanded at the current price level. Signup and view all the answers

What happens when there is a downward change in the price level?

The opportunity cost of consumer goods decreases, potentially increasing aggregate demand. Signup and view all the answers

How is equilibrium national income determined in a simple macro model?

Through the interaction of aggregate supply and demand curves. Signup and view all the answers

Study Notes

Macroeconomics Study Notes

Syllabus:
- Lectures are on Mondays and Wednesdays
- Students should attend at least one conference per week
- Discussion boards are organized by topic
- Exams are closed-book and multiple choice
- Midterm Exam: October 23rd, 30/20%
- Final Exam: December, 70/80%
- Textbook: Ragan Macroeconomics 17th ed.
- Micro vs. Macroeconomics
  - Microeconomics focuses on individual economic units like markets, consumers, firms.
  - Macroeconomics examines the overall economy.
- Macroeconomics Topics:
  - National income
  - Standard of living
  - Economic growth
  - Employment and unemployment
  - Prices and inflation
  - Exchange rates
  - Imports and exports
  - Monetary and fiscal policies
- Course Structure:
  - Learn basic economic theory
  - Apply theory to real-world concerns
  - Expand on basic theories

Circular Flow of Income and Expenditure

A diagram illustrating the flow of money and goods in an economy.
Shows the relationships between households, firms, and the government.
Injections (exports, investment, government purchases)
Withdrawals (imports, savings, taxes)
An injection into the circular flow increases economic growth
Injections = withdrawals means no change (equilibrium)

Macroeconomic Variables

Output generates income: Output creates income for producers.
Nominal GDP: The total market value of all final goods and services produced in a country in a specific time period.
Real GDP: Nominal GDP adjusted for inflation, reflecting changes in actual output.

Note: Nominal vs Real GDP

Nominal values are measured in current prices.
Adjusting for inflation is critical to determine real growth rate.
Real values expressed in base-year constant dollars are used to analyze changes in output quantity over time.

Businesses Cycle

Cyclical fluctuations: Economic activity is not always the same. It has periods of ups and downs.
Potential output: What output would occur if all resources are used at normal intensity?
Output gaps: Actual output compared to potential and potential output.
Recessionary vs. Inflationary gaps: Y < Y* (recessionary) and Y > Y* (inflationary).

National Income

Measure of economic performance
Recessions are associated with unemployment and lost output
Economic growth does not always mean everyone benefits equally

Employment and Unemployment

Employment: Measures how many people are employed.
Unemployment: Measures how many people are unemployed.
Labor Force and Unemployment rate: total people wanting to work that aren't working.
Note: A lack of change in the unemployment rate does not preclude an increase in the number of unemployed people.

Productivity

Output per unit of input:
productivity increase is the largest cause of long-term increases in standards of living.

Inflation and Price Level

Inflation: Percentage change in the price level.
Price level (P level): Average level of prices in an economy in a given time period in index form.
Consumer Price index (CPI): Measures the average prices of a basket of consumer goods and services.

Inflation Importance

Reduces purchasing power of money.
Creates expectations which affects behavior and decisions in an economy.
Nominal vs Real interest rates.

International Economy

Foreign exchange: foreign currencies.
Exchange rate: number of CAD to buy/sell unit of foreign currency.
Depreciation of CAD: decrease in exchange rate relative to another foreign currency.
Domestic prices of imports rise and vice versa for exports

Measuring GDP

Balance of payments:
Trade balance
Capital account balance
GDP growth: important for society's living standards.

Measuring GDP and Aggregate Expenditure

National Output and Value Added
- Intermediate and final products
- Value of final goods and services made in country.
- GDP includes exports but not imports
Importance: Measures the total value generated annually in an economy
Problem: Double-counting (measuring intermediate goods and services more than once) must be avoided.
Value added: Revenue minus cost of intermediate goods. Income for factors of production.

The Simple Short-Run Model

Desired aggregate expenditure (AE): divided into expenditure categories (autonomous and induced aspects)
Does not include government or trade
Investment is autonomous.
P is constant
What does "desired” mean? What is the extent of real world constraints of income and market prices?

The Multiplier Effect

The multiplier is the change in equilibrium from a change in autonomous expenditure.
The simple multiplier is 1 / (1 - MPC) where MPC is the marginal propensity to consume.
One person's spending is another person's income.
The process continues until additional savings equal the initial amount invested (or injection).

Introducing Government and Trade

Government expenditure (G): part of desired aggregate expenditure (AE) which includes all levels of government expenditure.
Net taxes (T) are total tax revenues decreased by transfer payments.
Net Tax Function: T=tY (t is the net tax rate; autonomous and average = marginal)
Budget in balance = G and T are equal.

Equilibrium and Adjustment

Equilibrium is where desired aggregate expenditure equals actual output.
If desired expenditure > actual output, there is pressure to increase output.
If desired expenditure < actual output, there is pressure to decrease output.

Aggregate Demand and Supply

AD: Relation between price level and equilibrium real GDP with desired AE=actual GDP.
AS: Relation between price level and equilibrium real GDP (output).
Equilibrium = intersection of AD and AS.
Shifts in AD/AS curve = caused by change in outside forces.

Adjustment in Macroeconomic Equilibrium

The speed of return to Y* depends on wage flexibility.
Rigid wages = slow adjustment process
Flexible wages = quick adjustment process
Long run equilibrium = Y* = vertical line on AS curve.

Inflation and Validation

Inflation is temporary unless monetary validation keeps AD increasing.
Validation = continuous increase in money supply (Ms), which causes the AD curve to shift upwards at the same rate as the AS curve.

Government Budget Constraints and Deficits

Budget Constraint = Government Expenditure = Tax Revenue + Borrowing.
Structural Budget component = Actual Y and Y*.
Cyclical Component = difference between actual deficit and structural deficit.

Debt and Fiscal Policy

Do deficits crowd out private activity?
Possible effects on investments and net exports:
Crowding out: expansionary fiscal policy decreases private spending.
Government sells more bonds = increases supply of bonds
Does debt harm future generations?
Debt redistributes resources and consumption, current generation versus future.

Exchange Rates

Foreign exchange: exchange of one country's currency for another.
Exchange rate: the rate at which one currency exchanges for another.
Appreciation: fall in the exchange rate; Canadian dollar becomes more valuable
Depreciation: rise in the exchange rate; Canadian dollar becomes less valuable

Money Supply and Interest Rates

Money supply: total number of money in an economy.
Interest rate: price of ‘credit’
Money and bonds are alternative ways of holding wealth.

Banking System

Most banking systems have: Central bank, commercial banks, deposit money.
Reserve Ratio.
Money creation process

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Description

This quiz explores the relationship between aggregate expenditure and national income at equilibrium. It covers key concepts such as marginal propensity to consume, the impact of government spending, and fiscal policy measures. Test your understanding of these fundamental economic principles!