L7._Aggregate_Expenditure_and_the_Multiplier

What does AE stand for in macroeconomics?

Aggregate Expenditure.

What is the key outcome when investment decreases from I0 to I1?

The level of Aggregate Expenditure (AE) and equilibrium output falls.

What is the multiplier (k) in economics and how is it calculated?

The multiplier (k) in economics measures the effect of an increase in spending on overall economic output.

It is calculated as the ratio of change in national income to the initial change in spending, often expressed as k = 1/(1-MPC), where MPC is the marginal propensity to consume.

What happens to equilibrium income when government spending (G) is added to the model?

It alters the equilibrium income calculation including the effects of government spending.

What is the consumption function according to the lecture?

C = a + bY, where C is consumption, a is autonomous consumption, b is the marginal propensity to consume, and Y is income.

What does the term 'marginal propensity to tax' (mpt) refer to?

It is defined as t = ∆T/∆Y, where T = total tax revenue, Y = income. It indicates how much an individual’s/household’s additional income will be taxed, thereby influencing disposable income and consumption in the economy.

How does fiscal policy impact the economy?

Fiscal policy utilizes changes in government spending (G) and taxes (t) to influence output levels.

What is the effect of an increase in the marginal rate of income tax (t) on the C + I + G line?

An increase in the marginal tax rate (t) flattens the slope of the C + I + G line, decreasing aggregate expenditure and reducing consumption and investment.

What occurs when there is an increase in the budget deficit?

Aggregate expenditure may increase, boosting output and employment. However, it can also lead to higher interest rates, crowding out private investment.

This is known as expansionary fiscal policy.

What are the limitations of fiscal policy

Time lags in policy changes, forecasting inaccuracies, and irreversible public investments.

What happens to the aggregate expenditure line when the tax rate increases?

The line reflects a reduced slope, resulting in greater decreases in national income.

What is indicated by a government budget surplus?

It occurs when tax revenues exceed government spending. This surplus can be used to pay down debt, invest in infrastructure, or be saved for future needs.

How is the government budget deficit calculated?

G – T = G - (t0 + tY), where T represents total tax revenue.

What does the multiplier concept imply regarding exogenous variable changes?

A rise in an exogenous variable leads to a multiplied effect on output.

What does the term 'discretionary economic management' pertain to?

It refers to the intentional changes in fiscal policy to influence the economy.

What is shown by a parallel downward shift in the C + I line?

It represents a fall in investment (I) within the equilibrium model.

What is the consequence of a lower marginal propensity to consume (b)?

It results in a smaller multiplier effect on income (Y). This means that any increase in aggregate expenditure will lead to a less significant overall increase in total income within the economy.

What does the model predict when the economy is initially at Y0 with spare capacity?

A fiscal expansion can raise aggregate expenditure and create full employment.

How does the existence of a public sector affect the size of the multiplier?

It typically makes the multiplier smaller than in a private sector-only model. This is because government spending and taxation can influence aggregate demand in ways that dampen the multiplier effect, leading to less overall impact on the economy.

What is required to reach the equilibrium condition AE = Y = C + I + G?

Consumption must be a function of disposable income after taxes.