CH8 - Aggregate Expenditure

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"What is aggregate expenditure (AE)?"

"Total spending on final goods and services in an economy over a given period."

"What is macroeconomic equilibrium?"

"The point where aggregate expenditure equals Real GDP (AE = GDP)."

"What is planned investment?"

"Intended spending on new capital goods and construction."

"What is actual investment?"

"Planned investment plus changes in inventories."

"What is autonomous expenditure?"

"Spending that does not depend on current income."

"What is induced consumption?"

"Consumption resulting from an increase in income."

"What is the multiplier?"

"The process where a change in autonomous expenditure causes a larger change in Real GDP."

"What is MPC?"

"The proportion of extra income spent on consumption."

"What is MPS?"

"The proportion of extra income saved."

"What is a positive output gap?"

"Actual GDP exceeds potential GDP."

"What is a negative output gap?"

"Actual GDP is below potential GDP."

"Does lower interest rates increase consumption?"

"Yes—borrowing is cheaper and saving is less attractive."

"Do lower interest rates increase investment?"

"Yes—borrowing costs fall."

"Does an appreciation increase exports?"

"No—exports become more expensive overseas."

"Does an appreciation increase imports?"

"Yes—imports become cheaper."

"Does depreciation increase exports?"

"Yes—exports become cheaper overseas."

"Does stronger overseas growth increase exports?"

"Yes—foreign demand rises."

"Does stronger domestic growth increase imports?"

"Yes—Australians buy more overseas goods."

"When is the economy in equilibrium?"

"When AE = Real GDP."

"How do firms respond to rising inventories?"

"Reduce production."

"Why do inventories matter?"

"They signal firms to increase or decrease production."

"Consumption function equation?"

"C = a + bY"

"What does 'a' represent?"

"Autonomous consumption."

"What does 'b' represent?"

"Marginal propensity to consume."

"What changes the slope of the consumption function?"

"A change in MPC."

"What starts the multiplier process?"

"A change in autonomous expenditure."

"What immediately happens after autonomous spending increases?"

"Income increases."

"What happens after income rises?"

"Induced consumption increases."

"Why does induced consumption occur?"

"One person's spending becomes another person's income."

"Why is the total increase in GDP larger than the initial spending?"

"Each round creates additional spending and income."

"When does the multiplier process finish?"

"When additional spending becomes negligible."

"Can consumption start the multiplier?"

"Yes

"Can investment start the multiplier?"

"Yes."

"Can government spending start the multiplier?"

"Yes."

"Can net exports start the multiplier?"

"Yes."

"Simple multiplier formula?"

"k = 1 ÷ (1 − MPC)"

"Alternative formula?"

"k = 1 ÷ MPS"

"Complex multiplier formula?"

"k = 1 ÷ (MPS + MPT + MPM)"

"What increases the multiplier?"

"A higher MPC and/or a increase in autonomous expenditure

"Why does a higher MPC increase the multiplier?"

"More income is re-spent each round."

"What decreases the multiplier?"

"Higher leakages."

"What are the leakages?"

"Savings, Taxes, Imports”

"What happens if autonomous spending falls?"

"Real GDP falls by a larger amount."

"What causes a positive output gap?"

"An increase in autonomous expenditure."

"What causes a negative output gap?"

"A decrease in autonomous expenditure."