Aggregate Expenditures and Macroeconomic Equilibrium
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Questions and Answers

What is the main cause of demand-pull inflation?

  • An increase in production costs
  • A decrease in the supply of goods
  • A rise in interest rates
  • An expansion of aggregate demand beyond full employment output (correct)

    • What happens to the economy as a consequence of cost-push inflation?

  • Full employment is achieved without any wage adjustments
  • Output decreases while the price level increases (correct)
  • The economy transitions to a recession without affecting prices
  • Output increases without any change in prices

    • How can increasing aggregate demand affect cost-push inflation?

  • It will have no effect on prices or output
  • It can restore full employment but may increase price levels further (correct)
  • It reduces the burden of taxes on consumers
  • It will always reduce inflation and increase output

    • Which of the following best describes the long-run consequences of demand-pull inflation?

    <p>It results in a higher equilibrium price level due to wage adjustments</p> Signup and view all the answers

    Which policy approach is primarily related to managing inflation within an economy?

    <p>Monetary policy through interest rate adjustments</p> Signup and view all the answers

    What is the effect of a $1 million increase in investment if the multiplier is 5?

    <p>$5 million increase in income</p> Signup and view all the answers

    Which of the following is considered an injection in the economy?

    <p>Government Spending (G)</p> Signup and view all the answers

    What occurs in equilibrium according to the principles of injections and withdrawals?

    <p>Total injections equal total withdrawals</p> Signup and view all the answers

    What is a recessionary gap?

    <p>The increase in spending required to return to full employment</p> Signup and view all the answers

    Which effect of aggregate demand describes the influence of wealth on purchasing power?

    <p>Wealth effect</p> Signup and view all the answers

    What happens to exports when the price level in the economy rises?

    <p>Exports decrease because their prices rise</p> Signup and view all the answers

    Which of the following is NOT a component of the consumption function?

    <p>Gross Income</p> Signup and view all the answers

    What is the primary shape of the aggregate demand curve?

    <p>Downward sloping</p> Signup and view all the answers

    What effect does an increase in consumption activity have on the aggregate demand curve?

    <p>It shifts the curve to the right</p> Signup and view all the answers

    What happens to the short-run aggregate supply curve when input prices increase?

    <p>It shifts to the left</p> Signup and view all the answers

    Which factor does NOT affect long-run aggregate supply?

    <p>Price level changes</p> Signup and view all the answers

    In macroeconomic equilibrium, what do the long-run and aggregate supply curves represent when they cross at the same point?

    <p>Long-run macroeconomic stability</p> Signup and view all the answers

    Which of the following components does NOT directly result in a shift of the aggregate demand curve?

    <p>Monetary policy</p> Signup and view all the answers

    How does an increase in business taxes affect aggregate supply in the short run?

    <p>It shifts aggregate supply to the left</p> Signup and view all the answers

    What is the relationship between price level and aggregate output in the short run?

    <p>Higher price levels can lead to increased output</p> Signup and view all the answers

    What is the immediate consequence of an increase in wages on aggregate supply in the short run?

    <p>Aggregate supply shifts left</p> Signup and view all the answers

    What is the shape of the Long-Run Aggregate Supply (LRAS) curve?

    <p>Vertical line</p> Signup and view all the answers

    Which factor is not associated with shifting the Long-Run Aggregate Supply (LRAS) curve?

    <p>Input prices</p> Signup and view all the answers

    In which scenario does Short-Run Equilibrium occur?

    <p>At the intersection of the SRAS and AD curves</p> Signup and view all the answers

    What causes the Short-Run Aggregate Supply (SRAS) curve to slope positively?

    <p>Sticky prices and wages</p> Signup and view all the answers

    Which of the following is a factor that can shift the SRAS curve?

    <p>Inflationary expectations</p> Signup and view all the answers

    Which of the following statements about macroeconomic equilibrium is true?

    <p>Long-Run Equilibrium occurs where LRAS and AD intersect</p> Signup and view all the answers

    What is the total effect of a round of spending according to the spending multiplier example provided?

    <p>$500 total spending from $100 initial spending</p> Signup and view all the answers

    Which of the following describes how the spending multiplier operates?

    <p>Initial spending creates income that leads to further consumption</p> Signup and view all the answers

    What is an example of mandatory spending by the government?

    <p>Social Security</p> Signup and view all the answers

    Which fiscal policy is used during a recession to stimulate aggregate demand?

    <p>Increasing government spending</p> Signup and view all the answers

    What is a potential disadvantage of implementing fiscal policy?

    <p>It is difficult to time accurately.</p> Signup and view all the answers

    What occurs during periods of inflation according to fiscal policy principles?

    <p>Governments decrease government spending and increase taxes.</p> Signup and view all the answers

    Which of the following correctly describes discretionary spending?

    <p>It is determined yearly by the legislative process.</p> Signup and view all the answers

    What is one consequence of increased government spending funded by debt?

    <p>Potential crowding out of consumption and investment.</p> Signup and view all the answers

    What typically happens to the economy if no political action is taken during a macroeconomic issue?

    <p>The economy will eventually correct itself.</p> Signup and view all the answers

    How can government taxation and spending change without any approval?

    <p>Automatic stabilizers such as unemployment benefits.</p> Signup and view all the answers

    What happens to tax revenues and welfare payments when the economy is booming?

    <p>Tax revenues rise and welfare payments fall</p> Signup and view all the answers

    What is a deficit?

    <p>A situation where spending exceeds revenue</p> Signup and view all the answers

    Which of the following lag types is NOT described in fiscal policy delays?

    <p>Communication lag</p> Signup and view all the answers

    What does public choice economists suggest about deficit spending?

    <p>It reduces the perceived cost of government operations</p> Signup and view all the answers

    What defines the national debt?

    <p>Total accumulation of past deficits minus surpluses</p> Signup and view all the answers

    Which of the following correctly distinguishes national debt from public debt?

    <p>National debt is the total accumulation of all debts, while public debt is debt held by the public</p> Signup and view all the answers

    What is the fiscal surplus?

    <p>Amount by which tax revenues exceed spending</p> Signup and view all the answers

    Which event could lead to government policies being mistimed?

    <p>Lag times in data collection and policy implementation</p> Signup and view all the answers

    Study Notes

    Aggregate Expenditures

    • Aggregate expenditures (AE) equal the sum of all spending in an economy.
    • Consumption is the largest component of aggregate spending.
    • Saving and consumption are related to income.
    • Marginal propensities to consume (MPC) and save (MPS) are constant.
    • Other factors affecting consumption and saving include: wealth, expectations about future income and prices, and the level of household debt.

    Math Formulas

    • Aggregate Expenditures (AE) = C + I + G + (X-M)
    • GDP = AE
    • C + S = Yd
    • APC = C/Yd
    • APS = S/Yd
    • MPC = ΔC/ΔYd
    • MPS = ΔS/ΔYd

    Macroeconomic Equilibrium

    • Keynesian macroeconomic equilibrium is the income level where there are no net pressures to change output.
    • In equilibrium, saving and investment are equal (S=I)
    • If desired saving exceeds desired investment, then income will fall.
    • If desired saving is below desired investment, income will rise.
    • If AE > Y, the economy must grow
    • If AE < Y, the economy must shrink

    Multiplier Effect

    • An increase in spending generates further increases in spending.
    • The multiplier effect is determined by the marginal propensity to consume (MPC).
      • Multiplier = 1/(1-MPC) or 1/MPS
    • The multiplier effect magnifies any increases or decreases in spending in an economy.
    • An increase in spending will result in a larger increase in income.
    • A decrease in spending will result in a larger decrease in income.

    Investment Demand

    • Investment levels depend primarily on the rate of return on capital.
    • Rates of return on investment are the primary driver for undertaking an investment.
    • Other factors that can affect investment decisions include expectations, technological change, operating costs, and the amount of capital goods on hand.

    Checkpoint Questions

    • Aggregate expenditures are equal to the sum of all spending in the economy.
    • Consumption is the most significant component of aggregate spending.
    • Marginal propensity to consume (MPC) and save (MPS) represent the change in consumption and savings with a change in income.
    • Wealth, expectations about future income and prices, and the level of household debt are additional factors that influence spending and savings.

    Table 1

    • Hypothetical consumption and savings, propensities to consume and save data is provided in the table.
    • This table shows the calculations of different economic variables.

    Other Determinants of Consumption and Saving

    • Income is a key determinant of consumption and savings, but other factors also influence them.
    • Wealth affects consumption in that increases will boost consumption.
    • Expectations about future income and prices affect spending patterns.
    • Household debt influences how much can be spent.
    • Taxes reduce spending.

    Other Topics

    • Paradox of Thrift: When people try to save more, consumption and investment fall, reducing overall income and saving.
    • Simple Aggregate Expenditures Model:  AE = C + I
    • Full Aggregate Expenditures Model:  GDP = AE = C + I + G + (X - M)
    • Calculating the multiplier: Using the formula 1 / (1 - MPC)
    • Government spending and taxes effects the multiplier
    • Macroeconomic Equilibrium: In a short-run macro-economic equilibrium, total injections must equal total withdrawals to prevent recession or inflation.

    GDP Gaps

    • Differences between actual income and full employment income are called GDP gaps.
    • Positive GDP gap: Actual output exceeds potential output.
    • Negative GDP gap: Actual output falls below potential output.

    Aggregate Demand and Aggregate Supply

    • Aggregate demand curve shows the relationship between the price level and overall demand for goods and services.
    • Aggregate supply curve shows the relationship between the price level and the total output of goods and services.
    • In the long run, aggregate supply is not influenced by prices and relies on existing resources and technology.

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    Related Documents

    Econ 103 Chapter 8, 9, 10 Notes PDF

    Description

    Explore the fundamentals of aggregate expenditures, consumption, and saving in the context of macroeconomic equilibrium. This quiz covers key formulas and concepts, including the relationship between saving and investment. Test your understanding of how these elements interact within an economy.

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