Economics Chapter 23: Aggregate Expenditure
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Questions and Answers

What is the typical size of the multiplier in the real world?

  • 2 (correct)
  • 4
  • 3
  • 1

    • What happens to equilibrium output when planned saving increases from S0 to S1?

  • It increases to 500
  • It increases to 700
  • It remains unchanged
  • It decreases to 300 (correct)

    • Which factor does NOT contribute to a reduction in the size of the multiplier?

  • Import levels
  • Tax payments depending on income
  • Consumer spending habits (correct)
  • Price level considerations

    • Which of the following describes the situation known as the 'Paradox of Thrift'?

    <p>Increased savings can lead to decreased overall savings</p> Signup and view all the answers

    What condition must be met for equilibrium to be restored in the multiplier equation?

    <p>Saving must equal desired investment</p> Signup and view all the answers

    What is the equilibrium aggregate output (income) indicated in the data provided?

    <p>500</p> Signup and view all the answers

    At what aggregate output level does unplanned inventory change equal zero?

    <p>500</p> Signup and view all the answers

    How does planned aggregate expenditure (AE) relate to aggregate output in terms of equilibrium?

    <p>AE must equal output for equilibrium.</p> Signup and view all the answers

    What is the relationship between savings (S) and investment (I) in determining equilibrium?

    <p>S must equal I.</p> Signup and view all the answers

    What occurs when planned aggregate expenditure is less than aggregate output?

    <p>Unplanned inventory increases.</p> Signup and view all the answers

    What is the formula used to derive the planned aggregate expenditure function?

    <p>AE = C + I</p> Signup and view all the answers

    At an aggregate output of 600, what is the change in inventory?

    <p>+25</p> Signup and view all the answers

    What does the point where the planned aggregate expenditure function crosses the 45° line represent?

    <p>Equilibrium output level</p> Signup and view all the answers

    What is the primary purpose of the Save More Tomorrow Plans?

    <p>To promote savings through commitment to future actions.</p> Signup and view all the answers

    What could result from a firm overestimating sales during a period?

    <p>Excess inventory beyond plans.</p> Signup and view all the answers

    How does an increase in interest rates typically affect planned investment spending?

    <p>It reduces planned investment spending.</p> Signup and view all the answers

    Which of the following best describes planned aggregate expenditure?

    <p>The total amount the economy plans to spend in a timeframe.</p> Signup and view all the answers

    What term did Keynes use to describe the emotional influences on entrepreneurs regarding investment decisions?

    <p>Animal spirits.</p> Signup and view all the answers

    Under what condition does equilibrium in the macroeconomic goods market occur?

    <p>When planned aggregate expenditure equals aggregate output.</p> Signup and view all the answers

    What does a planned investment schedule typically illustrate regarding interest rates?

    <p>Planned investment decreases as interest rates rise.</p> Signup and view all the answers

    What influences a firm's decision on how much to invest, according to the content?

    <p>Expectations of future sales.</p> Signup and view all the answers

    What does Output Y refer to in the context of economic analysis?

    <p>The number of goods and services produced</p> Signup and view all the answers

    What does the consumption function represent in Keynesian economics?

    <p>The level of consumption at each income level</p> Signup and view all the answers

    In the equation C = a + bY, what does 'b' represent?

    <p>The marginal propensity to consume</p> Signup and view all the answers

    What is the marginal propensity to save (MPS)?

    <p>The fraction of a change in income that is saved</p> Signup and view all the answers

    What does the term 'aggregate saving' refer to?

    <p>The part of aggregate income not consumed</p> Signup and view all the answers

    Which of the following statements about the consumption function is true?

    <p>It shows a direct relationship between income and consumption.</p> Signup and view all the answers

    What does the marginal propensity to consume (MPC) indicate?

    <p>The portion of additional income spent on consumption</p> Signup and view all the answers

    In the context of Keynes's theory, what is true about 'C' in the equation C = a + bY?

    <p>It refers to the level of consumption.</p> Signup and view all the answers

    What is the definition of aggregate output?

    <p>The total quantity of goods and services produced in an economy in a given period</p> Signup and view all the answers

    What does the term aggregate income refer to?

    <p>The total income received by all factors of production in a given period</p> Signup and view all the answers

    Which statement best describes the relationship between aggregate output and aggregate income?

    <p>They are equal in any given period</p> Signup and view all the answers

    What are the principles of the Keynesian theory of consumption primarily centered around?

    <p>The relationship between income levels and consumption patterns</p> Signup and view all the answers

    What distinguishes planned investment from actual investment?

    <p>Actual investment reflects what has been spent, while planned investment is an estimate</p> Signup and view all the answers

    How does the interest rate affect planned investment?

    <p>Lower interest rates generally increase planned investment</p> Signup and view all the answers

    What is the multiplier effect in economics?

    <p>The factor by which a change in spending results in a larger change in overall income</p> Signup and view all the answers

    What is the formula for deriving the multiplier?

    <p>1 divided by the marginal propensity to consume</p> Signup and view all the answers

    What is the condition for aggregate output to equal planned aggregate expenditure?

    <p>Saving equals planned investment (S = I)</p> Signup and view all the answers

    At what level of output does saving equal planned investment according to the provided economic model?

    <p>500</p> Signup and view all the answers

    If planned spending is less than output, what will firms do to reach equilibrium?

    <p>Decrease output</p> Signup and view all the answers

    What effect does an increase in planned investment have on the equilibrium output?

    <p>It increases equilibrium output by a multiple factor</p> Signup and view all the answers

    What is indicated by the term 'multiplier' in economic terms?

    <p>The ratio of change in equilibrium output to change in an exogenous variable</p> Signup and view all the answers

    How does the slope of the planned aggregate expenditure line affect the multiplier?

    <p>A steeper slope results in a larger multiplier</p> Signup and view all the answers

    What happened to General Motors' Silverado inventory during the economic downturn?

    <p>Inventory levels rose significantly</p> Signup and view all the answers

    What typically happens to inventory turns for firms during a recession?

    <p>They are expected to decrease</p> Signup and view all the answers

    Study Notes

    Chapter 23: Aggregate Expenditure and Equilibrium Output

    • Aggregate output (income) (Y) is a combined term that signifies the exact equality between aggregate output (production) and aggregate income during a specific period.
    • Aggregate output encompasses the total quantity of goods and services generated (or supplied) within an economy during a given period.
    • Aggregate income represents the aggregate amount of income earned by every factor of production over a specific timeframe.
    • In a given period, aggregate output and income remain equal.

    Keynesian Theory of Consumption

    • In Keynes's "The General Theory of Employment, Interest, and Money," current income is the prime determinant of consumption levels.
    • The consumption function illustrates the relationship between consumption and income.
    • A consumption function, specific to an individual household, demonstrates the level of consumption at various income levels for that household.
    • The aggregate consumption function, on a larger scale, demonstrates the level of total consumption at different levels of aggregate income. The upward slope indicates that higher income levels correspond to elevated consumption.
    • Consumption and income have a positive correlation. For every additional unit of income a consumer receives, a fraction or part of that income will contribute to consumption spending.
    • The marginal propensity to consume (MPC) signifies the proportion of a change in income that is used for consumption. The MPC is also the slope of the consumption function.
    • Saving (S) is the portion of aggregate income that's not consumed. Saving (S) = Income (Y) - Consumption (C).
    • Marginal propensity to save (MPS) is the fraction of a change in income saved. MPC + MPS = 1

    Planned Investment and Actual Investment

    • Inventory refers to the stock of goods held by firms awaiting sale.
    • Planned investment (I) represents planned additions to capital stock and inventory.
    • Actual investment encompasses the actual amount of investment incurred, including unplanned changes in inventory levels.
    • If a firm drastically overestimates the amount of sales, the unsold inventory will surpass anticipated levels.

    Planned Investment and the Interest Rate

    • An increase in the interest rate (r), holding all other factors constant, tends to reduce planned investment spending.
    • A decline in the interest rate makes borrowing less expensive, thus encouraging more investment projects.

    Other Determinants of Planned Investment

    • Investment decisions depend on expected future sales.
    • Entrepreneurs' optimism or pessimism about the economic outlook significantly impacts investment decisions.
    • Keynes employed the term "animal spirits" to describe the emotional factors influencing entrepreneurs' behavior.

    Determination of Equilibrium Output (Income)

    • Equilibrium occurs when there's no tendency for change in the macroeconomic goods market. It's reached when planned aggregate expenditure (AE) is equal to aggregate output (Y).
    • Planned aggregate expenditure (AE) is the overall amount the economy intends to spend in a certain period. AE = C + I (consumption + planned investment).
    • The equilibrium condition can be expressed as Y = C + I.

    The Multiplier

    • The multiplier is the ratio between a change in equilibrium output to a change in an exogenous variable.
    • An exogenous variable remains unchanged irrespective of the changes in the overall economy.
    • The slope of the planned aggregate expenditure line dictates the size of the multiplier. A steeper slope results in a larger multiplier effect.

    Multiplier Equation

    • The multiplier is calculated as 1 / (1 - MPC) or 1 / MPS.

    Adjustment to Equilibrium

    • Firms react to unplanned changes in inventory by adjusting output.
    • If unplanned inventory declines, firms boost production to reach equilibrium; otherwise, production falls to reconcile with equilibrium.

    The Paradox of Thrift

    • Increased thriftiness can lead to a decline in overall output and income.

    Other Determinants of Consumption

    • Consumption choices are also influenced by factors such as wealth, interest rates, and expectations about the future.

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    Principles of Economics Textbook PDF

    Description

    Explore the concepts of aggregate output and income as discussed in Chapter 23. Understand how these terms relate to the equilibrium output within an economy. Additionally, delve into the Keynesian Theory of Consumption and its implications on spending behavior based on current income.

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