Economics II Chapter 2 Quiz

Study Notes

Relationship Between Changes in Demand and Production

Increased demand typically leads to higher production levels as businesses respond to consumer needs.
Conversely, a decrease in demand can result in lower production, potentially causing layoffs or reduced working hours.

Components of Aggregate Demand (AD)

The primary components of AD include Consumption, Investment, Government Spending, and Net Exports.
Import spending is NOT included in the calculation of Aggregate Demand.

Formula for Net Exports or Trade Balance

Net Exports (or Trade Balance) is calculated as:
- Net Exports = Exports - Imports

Characteristics of Trade Surplus

During a Trade Surplus, exports exceed imports.
A country experiences an inflow of currency and may see improved economic health as a result.

Definition of Inventory Investment

Inventory Investment represents changes in the stock of unsold goods.
It indicates how much businesses are investing in maintaining or increasing their inventory levels.

Aggregate Demand in a Closed Economy

In a closed economy with no imports or exports, Aggregate Demand (AD) can be expressed as:
- AD = Consumption + Investment + Government Spending

Marginal Propensity to Consume (C1)

The marginal propensity to consume (C1) signifies the fraction of additional income that households spend on consumption.
A higher C1 indicates that consumers are more likely to spend rather than save.

Equation for Private Savings (S)

Private savings (S) can be represented as:
- S = Income - Taxes - Consumption

Endogenous Variables in the Model

Endogenous variables are determined within the model and change in response to other variables (e.g., consumption, investment).
Their values are influenced by the relationships established in the economic model.

Role of Governments with Exogenous Variables

Governments have control over exogenous variables, which are influenced by external factors and are not determined by the model.
Policy decisions, such as fiscal or monetary policies, shape these variables to impact the economy.

Description

Test your knowledge on the changes in macro-indicators, interactions among production, income, and demand, and the cycle of changes in demand, production, and income. Explore the positive and negative impacts on the economy with real-life examples.