EC140 Lecture 6: Chapters 21/22

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EC140 Lecture 5: one class notes- chapter 21

EC140 Lecture 6: Chapters 21/22

EC140 Lecture Notes - Lecture 7: Canadian Dollar, Government Spending

Document Summary

Continued chapter 21 and start of chapter 22 lecture notes . Changes in equilibrium national income: magnitude= size of the change, the multiplier is the ratio of the change in the equilibrium income because of the change in the autonomous component of ae, the simple multiplier . Ae=c + i =a + by +io = y. Math: ye=( a +io )/ (1 b: one implication: a change in consumer preference can change the equilibrium income, regarding the multiplier . Since 0 < z <1, the multiplier is > 1. The change in income > the change in autonomous spending. Mpc=0. 75 (=z, in this model below: consider how an increase in autonomous investment of 1 would have a 0 effect on income. Chapter 22- adding government and trade to the simple marco. Intuition: almost all taxes rise with income or spending: transfers and income have a negative relationship, transfers that are clearly sensitive to income are welfare and e. i payments.

Related Questions

Assignment 4 (Chapter 23) Sequestration 2013

Dear Colleagues,

Using the goods and services model from the text (what I have labeled the 'Commodities Model' in my syllabus or the Keynesian Cross), please offer a basic analysis of the sequestration of expenditures by the Federal Government that took effect on March 1^st. Please limit your analysis to an expenditure equation containing only personal consumption expenditures (C) and planned investment (I_o). (The aggregate expenditures equation would be limited to AE = C + I_o_.) Please note that I want you to ignore the impact of any direct reduction in governmental expenditures upon aggregate expenditures as is discussed in chapter 24. In particular, discuss and model the effects of the Sequestration on C. Also, would there be a possible effect on I_o? Please explain the conclusions that you reach. Before beginning your analysis please read the articles listed below:

Sequestration: The Truth Behind The Spending Cut, Mani.

http://www.istockanalyst.com/finance/story/6318811/sequestration-the-truth-behind-the-spending-cuts

Paragraph 7 in particular in the article above

Fiscal Multipliers, the IMF & the OBR, Weldon, Duncan.

http://touchstoneblog.org.uk/2012/10/fiscal-multipliers-the-imf-the-obr/

Deleveraging Shocks and the Multiplier (Sort of Wonkish), Krugman, Paul,

http://krugman.blogs.nytimes.com/2012/10/09/deleveraging-shocks-and-the-multiplier-sort-of-wonkish/

In your analysis, please use the Keynesian Theory of Consumption as the model to represent household expenditures. You may assume that the aggregate expenditure function (line) has only consumers and business, and business expenditures are not dependent upon income (as presented in the text).

Of what importance is the discussion of the multiplier mentioned in the last two articles?

Is it possible that business expectations about the future will change?

What would change in the model as a result of this change in expectations (Please discuss the potential impact on inventories)?

As you perform your analysis, you do not have to specify exact values on the axes. Your response will be graded upon your ability to determine the direction in which incomes will change, either increasing or decreasing, due to the sequestration and if the change will be large or small. (Recall that income, Y, is represented on the horizontal axis in the Keynesian Cross model.) In your model, be sure to begin your analysis with aggregate expenditures at pre-sequestration levels and equilibrium income. Then indicate the appropriate movement of the consumption function and business planned investment and the effect on equilibrium income.

Also, provide a brief explanation of how unplanned investment would change as a result of the sequestration and how the unplanned investment causes equilibrium income to increase or decrease.

The book Principles of Economics, Tenth Edition, Chapter 23 - Sequestration 2013.

tealhamster375

1. The multiplier helps explain

A. why a decrease in taxes causes real Gross Domestic Product (GDP) to fall by more than the amount of the decrease in taxes.

B. why a fall in investment cause real Gross Domestic Product (GDP) to rise by more than the amount of the decrease in investment.

C. why a rise in government expenditures causes real Gross Domestic Product (GDP) to rise by more than the amount of the increase in government spending.

D. why an increase in disposable income causes real Gross Domestic Product (GDP) to rise by less than the amount of the increase in disposable income.

2. If the marginal propensity to save (MPS) increases, the multiplier

A. decreases.

B. can either increase or decrease, depending on what happens to the marginal propensity to consume (MPC).

C. stays the same.

D. increases.

QUESTION 60

The investment function will shift when there is a change in

		A. the opportunity cost of retained earnings.
		B. firms' profit expectations.
		C. the cost of borrowing.
		D. the interest rate.

1.43 points

QUESTION 61

In the Keynesian model, whenever planned saving exceeds planned investment,

		A. there will be unplanned inventory accumulation.
		B. real GDP will not be influenced.
		C. the interest rate will remain unchanged.
		D. there will be unplanned inventory depletion.

1.43 points

QUESTION 62

In the Keynesian model, whenever planned saving is less than planned investment,

		A. there will be unplanned inventory depletion.
		B. the interest rate will remain unchanged.
		C. there will be unplanned inventory accumulation.
		D. real GDP will not be influenced.

1.43 points

QUESTION 63

Government purchases

		A. are determined by the political process.
		B. are determined by the public.
		C. are influenced by interest rates.
		D. are determined by suppliers.

1.43 points

QUESTION 64

If, at some level of output, total planned real expenditures are less than real Gross Domestic Product (GDP),

		A. real GDP will either fall or remain unchanged, depending on the MPC.
		B. real GDP will rise.
		C. real GDP remains unchanged.
		D. unplanned inventories will increase and real GDP will fall.

1.43 points

QUESTION 65

When the economy is operating at the equilibrium level of GDP, we know that

		A. total planned real expenditures equal real GDP.
		B. real net exports equal inventory changes.
		C. planned real investment spending equals real net exports of zero.
		D. total planned real consumption expenditures equal real GDP.

1.43 points

QUESTION 66

One divided by the marginal propensity to save (MPS) is the formula for

		A. the inverse of the multiplier.
		B. the multiplier.
		C. one minus the multiplier.
		D. autonomous consumption.

QUESTION 67

Thinking like an economist would, which is true of investment?

		A. Investment represents spending on capital goods.
		B. Investment is a stock concept.
		C. Investment is putting money into stocks and bonds.
		D. It is the portion of disposable income that is not used for consumption or saving.

QUESTION 68

Other things being equal, if input prices rise in a country, then there would be

		A. cost-push inflation.
		B. demand-pull inflation.
		C. cost-pull deflation.
		D. more production and a lower price level.

QUESTION 69

In the short run, if the price level rises, then the overall economy can temporarily produce beyond its nominal capacity. One reason for this is that

		A. existing capital equipment can be used more intensively.
		B. wage rates rise almost simultaneously with the price level.
		C. the unemployment rate usually rises dramatically along with the price level.
		D. workers can be switched from counted to uncounted production.

fuchsiaclam197

In the Keynesian model

aggregate demand determines real GDP per year.

the short-run aggregate supply curve determines real GDP.

unemployment cannot persist for long periods of time.

the aggregate demand curve determines the price level.

A terrible winter storm causes enormous problems in the

northeastern

part of the United States. This would cause

the short-run aggregate supply curve to shift to the left, but would have no effect on the long-run aggregate supply curve.

both the short-run and the long-run aggregate supply curves to shift to the left, but the long-run aggregate supply curve would shift more than the short-run curve.

the short-run aggregate supply curve to shift to the left, and the long-run aggregate supply curve would shift to the right.

both the short-run and the long-run aggregate supply curves to shift to the right in equal amounts.

Equilibrium real GDP rises after the dollar strengthened. From this we can conclude that

the increase in aggregate demand was greater than the decrease in aggregate supply.

the decrease in aggregate demand was more than the increase in aggregate supply.

the decrease in aggregate demand was less than the increase in aggregate supply.

the increase in aggregate demand was less than the decrease in aggregate supply.

Saving is

the difference between real GDP and disposable income while savings is the difference between disposable income and consumption spending.

the amount one does not consume in a given period of time while savings is the accumulation of past periods of saving.

the difference between disposable income and spending on goods and serviceswhile savings is the difference between real GDP and disposable income.

the accumulation of past periods of savings while savings is the amount of disposable income that is not consumed in a given period of time.

A permanent reduction in investment spending leads to

a proportional decrease in real GDP.

a more than proportional decrease in real GDP.

a more than proportional increase in real GDP.

a less than proportional decrease in real GDP.

An increase in net exports leads to an increase in real GDP. Further,

consumption spending increases while investment spending decreases.

consumption spending increases but saving does not change.

consumption spending and saving increase.

government spending decreases to offset the increase in net exports.

An increase in aggregate spending that is caused by a factor other than the price level will lead to the

aggregate demand curve shifting to the right.

aggregate supply curve shifting to the right.

aggregate supply curve shifting to the left.

aggregate demand curve shifting to the left.

The marginal propensity to consume is 0.9. The multiplier is

0.9.

1.11.

0.1.

10.

When the SRAS curve slopes upward, the actual affect of an increase in real autonomous spending on equilibrium real GDP is smaller than predicted by the multiplier because

real GDP increases.

the price level rises

the price level falls.

real GDP decreases.

Other things equal, the lower the total real value of final goods and services demanded in the economy the

more the production possibilities cure shifts to the left.

lower the price level.

higher the price level.

lower the level of endowments.

The long-run aggregate supply curve can be thought of as the

level of output for which real GDP equals nominal GDP.

level of output that the nation is currently producing.

level of real GDP associated with a constant price level.

full-employment level of real GDP.

EC140 Lecture 6: Chapters 21/22

EC140 Lecture 5: one class notes- chapter 21

EC140 Lecture 6: Chapters 21/22

EC140 Lecture Notes - Lecture 7: Canadian Dollar, Government Spending

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