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What is the primary focus of short run macroeconomics?

Explaining why national output can deviate from its potential level, particularly in relation to the GDP gap.

What are the two possible uses of disposable income?

Consumption and saving.

What does the consumption function represent?

The relationship between household consumption spending and the variables that influence it, primarily current personal disposable income.

What macroeconomic problems are indicated by GDP deviations?

Inflation when actual GDP is above potential, and unemployment with lost output when actual GDP is below potential.

What are the key categories explaining GDP determination?

Household consumption, investment, government consumption, and net exports.

What are the marginal propensity to consume (MPC) and marginal propensity to save (MPS)?

They measure the responsiveness of changes in desired private consumption and saving to changes in household disposable income, with both summing to unity.

What is induced spending?

The part of consumption that responds to changes in income.

What determines investment spending?

It depends on factors such as real interest rates and business confidence.

What happens at the equilibrium level of GDP?

Purchasers wish to buy exactly the amount of national output being produced.

How is equilibrium GDP represented graphically?

By the point at which the aggregate spending curve intersects the 45° line.

What effect do changes in desired spending have on GDP?

A rise in desired consumption or investment increases equilibrium GDP, while a fall decreases it.

What is the multiplier effect in macroeconomics?

It measures the effect on GDP of shifts in autonomous spending, defined as K = ΔY/ΔA.

What is the simple multiplier formula?

1/(1 – c), where c is the marginal propensity to spend out of GDP.

What prediction does macroeconomics make about the simple multiplier?

The simple multiplier is greater than unity, relating increased spending on domestic output to the resulting increase in GDP.