Economics 1022A/B Study Guide - Final Guide: Phillips Curve, Aggregate Demand, Price Level

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ECON 1022A/B Full Course Notes

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A change in consumption in response to a change in income is. Ae= 100+0. 8y y=100+0. 8y y(1-0. 8)=100 y= 1/ (1-0. 8) *(100) y= 1/0. 2 (100) y= 5(100) = 500: refer to table x. : b (y- intercept is autonomous expenditure: multiplier is. M=1/(1-slope of expenditure) = eq (or real gdp)/autonomous expenditure: if investment increases by b, real gdp becomes. I is originally (for this question), + = b + b = b. Real gdp + autonomous expenditure + b = b: a rise in the price level. : decreases aggregate expenditure and produces a movement up along the aggregate demand curve. Expenditures go down: suppose that investment decreases by billion. If the multiplier is 2, and the short-run ag- gregate supply curve is positively sloped. : decreases by less than m: refer to figure y. : a one time rise in the price level: if natural unemployment rate falls.

Related Questions

Consider a small open economy in which aggregate expenditures, AE, is the sum of consumption spending by households, investment spending by firms, government expenditures and net exports. You may assume that net exports are independent of real GDP and taxes are lumpâsum. The numbers in the table below are in billions.

Real GDP	Consumption	Investment	Gov't Expend.	Net Exports	Taxes	Aggregate Expenditures
1000	1430	120	50	-100	160	A
2000	B	120	50	-100	160	2250
3000	2930	120	50	-100	160	3000
4000	3680	120	50	-100	160	3750
5000	4430	120	50	-100	160	4500

a. (4 pts) For the table below, calculate the missing values, A and B. b. (2 pts) From the table above, what kind of situation is the country in with regards to the trade balance (i.e. do we have a trade surplus or deficit)? What kind of situation is the country in with regards to the domestic balance (i.e. is the government running a deficit or surplus)? c. (4 pts) Use the table above to calculate the slope of the AE curve. [Hint: Recall that the slope of the AE curve is the additional increase in aggregate expenditures arising from an increase in GDP.] d. (4 pts) Recall that the Aggregate Expenditure function is written as: AE = AE0 + (slope of AE) *Y where AE0 is Autonomous Expenditures. Use the table in part (a) and your answer to part (c) above to calculate Autonomous Expenditure AE0. [Hint: Calculate induced expenditures for any given level of GDP, and use your answer to figure out AE0] e. (2 pts) In the table above, what is the value of real GDP in equilibrium? f. (4 pts) Suppose that the government decides to spend 500 billion more. By calculating the multiplier (or any other way), calculate the value of the new equilibrium value of real GDP!

Question 1

Which of the following describes the relationship between the change in inventories and aggregate expenditure?

A.	Aggregate expenditure equals the change in inventories minus GDP.
B.	The change in inventories equals GDP divided by aggregate expenditures.
C.	Aggregate expenditures equals GDP divided by the change in inventories.
D.	Aggregate expenditures equals GDP minus the change in inventories.
E.	The change in inventories equals GDP multiplied by aggregate expenditure.

1 points

Question 2

Suppose the marginal propensity to consume is 0.80 and taxes decrease by $10 billion. Which of the following is true?

A.	Disposable income and consumption fall by $10 billion
B.	Disposable income and consumption rise by $10 billion
C.	Disposable income rises by $10 billion and consumption rises by $8 billion
D.	Disposable income falls by $10 billion and consumption falls by $8 billion
E.	Disposable income rises by $10 billion and consumption falls by $8 billion

1 points

Question 3

If aggregate expenditure at a particular level of income is less than output,

A.	output will increase
B.	output will decrease
C.	output will remain the same
D.	output will rise slightly and then level off
E.	we cannot determine what will happen to output

1 points

Question 4

The consumption function

A.	illustrates the relationship between real disposable income and real consumption spending
B.	illustrates the relationship between the price level and real consumption spending
C.	is the relationship between productivity and real consumption spending
D.	shows how real consumption increases when real disposable income decreases
E.	illustrates the relationship between real consumption spending and employment

1 points

Question 5

The focus of the short-run macro model is on the role of

A.	spending in explaining economic fluctuations
B.	labor in explaining economic fluctuations
C.	financial markets in explaining economic fluctuations
D.	output in explaining economic fluctuations
E.	resources in explaining economic fluctuations.

1 points

Question 6

If the output level is such that the aggregate expenditure line lies below the 45-degree line, which of the following is true?

A.	Aggregate expenditure is greater than output, so inventories will increase and output will be raised.
B.	Aggregate expenditure is greater than output, so inventories will decrease and output will be increased.
C.	Aggregate expenditure is less than output, so inventories will decrease and output will be raised.
D.	Aggregate expenditure is less than output, so inventories will increase and output will be lowered.
E.	Aggregate expenditure is greater than output, so inventories will increase and output will be lowered.

1 points

Question 7

If the marginal propensity to consume is 0.7, the expenditure multiplier is

A.	7.0
B.	0.7
C.	3.0
D.	3.3
E.	not determinable without additional information.

1 points

Question 8

Aggregate expenditure is the sum of

A.	all types of spending by households and firms
B.	spending and savings by households
C.	spending by households and governments on final goods and services
D.	spending by households, government, firms, and foreigners on final goods and services
E.	all spending and saving by households, firms, and governments

1 points

Question 9

If the marginal propensity to consume is 0.5 and disposable income increases by $10,000, by how much will consumption spending increase?

A.	$10,000
B.	$500
C.	$50
D.	$5,000
E.	$9,524

1 points

Question 10

When real consumption expenditure is plotted against real disposable income the resulting relationship is

A.	very weak.
B.	virtually flat .
C.	positive and very close to linear.
D.	negative and very close to linear.

indigognu668

In the country of Utopia, the structure of the economy is described as the following:

Y = C + I + G + (X â M)

C = C0 + (mpc)(DI)

I = I0 + (mpi)(Y)

M = M0 + (mpm)(DI)

DI = Y â T

T = (t)(Y)

Where Y is the level of real GDP in the economy, DI denotes the disposable income in the economy, C represents the level of consumption in the economy, C0 is the autonomous consumption level, mpc denotes the marginal propensity to consume, I is the level of investment in the economy, I0 characterizes the autonomous investment, mpi is the marginal propensity to invest, G characterizes the level of government expenditure, X is the level of export from the country, M represents the amount of import in the country, M0 is the level of autonomous import, mpm denotes the marginal propensity to import, T is the amount of tax imposed in the country, and t represents the average tax rate in the economy.

After extensive research, the economists in Utopia believe that the following values (all the dollar values are in number of millions) can be assigned to the structure of the economy, C0 = $500; mpc = 0.8; I0 = $200; mpi = 0.2; G = $400; X = $300; M0 = $100; mpm = 0.1; and t = 0.25. The Utopian economists further believe that the level of potential GDP in the country is $4,000.

Questions:

1. What is the demand side equilibrium level of real GDP in the country? Please show your calculations.

2. Is the overall Utopian economy in equilibrium? Elaborate your answer.

3. If the economy is not in equilibrium, what will happen eventually? Explain your answer.

4. What is the value of the overall multiplier? Please show your calculations and explain the value.

The country of Utopia is probably experiencing a recessionary pressure in its economy now. The economists are suspecting that, since the latest estimates of mpc, mpi, and mpm indicate that their estimated values have gone down to 0.65, 0.15, and 0.05 respectively.

5. What is the demand side equilibrium level of real GDP in the country now? Please show your calculations.

6. Is the overall Utopian economy now in equilibrium? Elaborate your answer.

7. If the economy is not in equilibrium now, what will happen eventually? Explain your answer.

8. What is the adjusted value of the overall multiplier? Please show your calculations and explain the value.

Economics 1022A/B Study Guide - Final Guide: Phillips Curve, Aggregate Demand, Price Level

ECON 1022A/B Full Course Notes

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