Questions and Answers
The largest component of aggregate demand is consumption.
False
Investment depends primarily upon the current level of income.
False
Cyclical unemployment can result from a decrease in spending by business and government.
False
Even if market participants are unwilling to buy all of the output produced, the economy will always achieve full employment macro equilibrium.
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The consumption function will shift because of a change in current disposable income.
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The point where aggregate demand and aggregate supply are equal always represents:
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Which of the following includes all the components of aggregate demand?
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The determinants of consumption include:
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The marginal propensity to consume is the:
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Dissaving:
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As the MPC becomes larger, the multiplier becomes larger, too.
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The multiplier is used to determine the cumulative change in total output that results from an initial change in spending.
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Equilibrium GDP is always the most desired level of GDP for an economy.
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When there is an inflationary spiral, there is excess demand for goods and services, and consumers bid up prices by competing for those goods and services.
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The aggregate supply-aggregate demand model can be used to predict changes in spending behavior that will affect output and prices.
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A leakage from the circular flow is:
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According to the Keynesian view of macro economy, when the economy is at equilibrium:
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When the economy is in equilibrium, all of the following are true except:
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If actual investment exceeds desired investment then:
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In which of the following cases would cyclical unemployment tend to increase:
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Fiscal policy works primarily through shifts of the AD curve.
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From a Keynesian perspective, the way out of a recession is to increase government spending, tax cuts, or increase transfer payments.
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A recessionary GDP gap represents the value of output that could have been produced but wasn't because people are lazy.
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A tax cut contains less stimulus to the economy than an increase in govt spending of the same size because some of the tax cut is saved.
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Study Notes
Aggregate Demand
- Consumption is the largest component of aggregate demand.
- Investment is independent of the current level of income.
- Cyclical unemployment arises from decreased spending by businesses and government.
Economic Equilibrium
- Full employment macro equilibrium is not guaranteed if market participants do not buy all produced output.
- The intersection of aggregate demand and aggregate supply indicates macro equilibrium.
Components of Aggregate Demand
- Aggregate demand consists of consumption, government spending, net exports, and imports.
- Key determinants of consumption include current income, taxes, and wealth.
- The marginal propensity to consume (MPC) measures additional consumption resulting from additional income.
Saving and Consumption
- Dissaving occurs when consumption exceeds real GDP.
- As the MPC increases, the multiplier effect on the economy also increases.
GDP and Inflation
- The multiplier determines the cumulative change in total output based on initial spending changes.
- Equilibrium GDP is not necessarily the most desired GDP for an economy.
- An inflationary spiral indicates excess demand, leading to price increases.
Circular Flow and Keynesian Economics
- Leakages from the circular flow of income are diversions of income from spending on output.
- According to the Keynesian view, equilibrium is reached when aggregate supply equals aggregate demand (AS = AD).
Unemployment Dynamics
- Increases in cyclical unemployment correspond with situations where the supply of goods exceeds demand.
- Actual investment exceeding desired investment leads to increased inventories.
Policy Implications
- Fiscal policy affects the economy primarily through shifts in the aggregate demand curve.
- Keynesian economics suggests that increasing government spending or cutting taxes can help overcome recessions.
- Tax cuts generally provide less economic stimulus than equivalent government spending increases due to saving behavior.
Summary of Economic Concepts
- A recessionary GDP gap results from unrealized output potential, not merely a lack of effort.
- Desired levels of saving should equal spending for an economy to be in equilibrium.
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Test your knowledge of macroeconomic concepts with these flashcards. Each card presents a statement about aggregate demand, investment, and unemployment in an interactive true or false format. Perfect for exam preparation or quick revision.
