Questions and Answers
What determines the quantities that firms sell in the Keynesian model?
In the Keynesian model, firms set their prices based on the quantity they wish to sell regardless of consumer demand.
False
What are the four components of aggregate expenditure?
Consumption expenditure, investment, government expenditure on goods and services, net exports.
In the Keynesian model, an increase in aggregate expenditure leads to an increase in _____ GDP.
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Match each factor influencing consumption expenditure to its description.
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Which of the following is NOT a component of aggregate expenditure?
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In the Keynesian model, prices are flexible and adjust immediately to changes in aggregate demand.
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What happens to prices if a firm persistently sells more than it plans to?
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What is the term for the consumption expenditure that occurs even if disposable income is zero?
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Planned consumption expenditure plus planned saving always totals to aggregate income.
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What does the consumption function illustrate?
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Disposable income is defined as aggregate income minus ______ plus transfer payments.
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At which point on the consumption function does consumption expenditure equal disposable income?
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Match the following terms with their definitions:
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Induced consumption occurs when disposable income decreases.
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What is the relationship called between saving and disposable income?
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Study Notes
Fixed Prices and Expenditure Plans
- In the Keynesian model, firms set fixed prices and sell quantities based on customer demand.
- Persistent sales beyond planned levels lead firms to increase prices; low sales result in price reductions.
- Consequently, the overall economy experiences:
- A fixed price level.
- Aggregate demand driving real GDP.
Components of Aggregate Expenditure
- Aggregate expenditure comprises four main components:
- Consumption expenditure
- Investment
- Government expenditure on goods and services
- Net exports (exports minus imports)
- Aggregate planned expenditure is the sum of the planned levels of these components.
Real GDP and Aggregate Expenditure Relationship
- There exists a two-way relationship between aggregate expenditure and real GDP:
- An increase in real GDP boosts aggregate expenditure.
- An increase in aggregate expenditure raises real GDP.
Consumption and Saving Plans
- Key factors influencing consumption expenditure and saving:
- Disposable income
- Real interest rates
- Wealth
- Expected future income
- Disposable income is calculated as aggregate income minus taxes plus transfer payments, linking it directly to real GDP.
Consumption Function
- The consumption function illustrates the relationship between consumption expenditure and disposable income.
- Planned consumption plus planned saving equals disposable income.
- As disposable income increases, consumption expenditure also rises.
Autonomous and Induced Consumption
- Autonomous consumption occurs at zero disposable income, representing short-term consumption behavior.
- Induced consumption increases with disposable income, reflecting consumer spending driven by income levels.
Graphical Representation
- The consumption function can be represented graphically, with the y-axis indicating consumption expenditure and the x-axis showing disposable income.
- A 45° line on the graph indicates points where consumption expenditure equals disposable income:
- Points below the 45° line indicate consumption exceeding disposable income.
- Points above the 45° line indicate consumption below disposable income.
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Description
This quiz explores the concepts of fixed prices and expenditure plans within the Keynesian model. Understand how firms adjust their pricing strategies based on inventory levels and consumer demand. Test your knowledge on these fundamental economic principles from the chapter.
