chapter 10 + 11 macroeconomics

question

consumption function:

answer

consumer spending is a function of disposable income

question

dissavings

answer

when consumer spending is greater than disposable income

question

you can go into dissavings in two ways:

answer

dipping into past savings or borrowing

question

Break even level of disposable income:

answer

when there are no savings or no dissavings; people spend what they have

question

APC: average propensity to consume:

answer

consumer spending over disposable income; what fraction of your disposable income do you spend

question

APS: average propensity to save:

answer

savings over disposable income: what fraction of your disposable income that you save

question

MPC: marginal propensity to consume:

answer

change in consumer spending divided by the change in disposable income

question

MPS: marginal propensity of saving:

answer

how much you're able to save

question

the reason MPC and MPS is more important is because...

answer

the government has more money to spread into the economy and if they put the money into the hands of people with the highest MPC (poor people who will spend it quickly) so the money will circulate back into the economy

question

What's the most important thing that decides what consumer spending will be:

answer

disposable income

question

Wealth

answer

how much you have accumulated

question

Wealth effect:

answer

the wealthier you feel, the more you tend to spend

question

Borrowing + real interest rate:

answer

the lower the real interest rate is, the easier it is to borrow (people get suckered into buying a car with the grandeur of 0.0% interest rate)

question

Non-income determinants of consumption:

answer

-Wealth (effect)
-Borrowing
-Expectations
-Taxes
-Stability (how stable is the country and environment)

question

Paradox of thrift:

answer

the more people try to save money, the less people in general will be able to save money (if people aren't spending, people are going to get fired and won't be able to save, even if they wanted to)

question

Reverse wealth effect:

answer

if you're holding onto something and it decreases in value, you're less likely to spend (an example is stock)

question

Investment spending:

answer

what businesses spend on new capital goods

question

Investment spending, conceptually, is...

answer

a function of the expected rate of return the businesses want to make on their project (r)

question

Determinants of investment spending:

answer

-Acquisition maintenance + operating costs (if these go up, investment spending goes down)
-Business taxes (cut investments because its money businesses can't spend on capital goods)
-Expectations
-Stock of capital goods on hand
-Technology changes (if technology advances, businesses have to spend more money to buy)
-Planned inventory changes

question

What Is the main thing that causes the ups and downs in a business cycle?

answer

consumer spending + investment spending + government spending + net exports (what foreigners buy)

question

Investment spending changes the most...

answer

from one period to the next

question

Why investment spending so unpredictable:

answer

-Big ticket, all-or-nothing capital items
-Durability
-Variable expectations
-Irregular innovation
-Variable profits

question

Multiplier effect:

answer

any change in spending (consumer, investment, government and net exports) causes a greater change in output/income

question

Formula:

answer

initial change in spending x multiplier

question

Why is actual multiplier lower than predicted

answer

Leakages: savings, taxes, imports

Full strength vs less than full strength multiplier

question

Equilibrium:

answer

when total output or total supply is equal to total spending demand (we only worry about consumer and investment spending)

question

If spending is greater than output...

answer

then output is gonna be pulled up

question

Is spending is less than output,

answer

then producers are going to cut back and produce less

question

Retaliation:

answer

if we do something bad to another country, they'll come back with something worse

question

Recessionary gap:

answer

the fact that the economy come to rest somewhere below the full employment level and the recessionary gap is the difference between a resting economy and GDP

question

Inflationary gap:

answer

when you're at equilibrium AND you're at full employment so spending goes up

question

Classical economists theorized:

answer

Wage price flexibility

Full employment is the normal situation

Say's law's supply creates its own demand

1 of 32

question

consumption function:

answer

consumer spending is a function of disposable income

question

dissavings

answer

when consumer spending is greater than disposable income

question

you can go into dissavings in two ways:

answer

dipping into past savings or borrowing

question

Break even level of disposable income:

answer

when there are no savings or no dissavings; people spend what they have

question

APC: average propensity to consume:

answer

consumer spending over disposable income; what fraction of your disposable income do you spend

question

APS: average propensity to save:

answer

savings over disposable income: what fraction of your disposable income that you save

question

MPC: marginal propensity to consume:

answer

change in consumer spending divided by the change in disposable income

question

MPS: marginal propensity of saving:

answer

how much you're able to save

question

the reason MPC and MPS is more important is because...

answer

question

What's the most important thing that decides what consumer spending will be:

answer

disposable income

question

Wealth

answer

how much you have accumulated

question

Wealth effect:

answer

the wealthier you feel, the more you tend to spend

question

Borrowing + real interest rate:

answer

the lower the real interest rate is, the easier it is to borrow (people get suckered into buying a car with the grandeur of 0.0% interest rate)

question

Non-income determinants of consumption:

answer

-Wealth (effect)
-Borrowing
-Expectations
-Taxes
-Stability (how stable is the country and environment)

question

Paradox of thrift:

answer

the more people try to save money, the less people in general will be able to save money (if people aren't spending, people are going to get fired and won't be able to save, even if they wanted to)

question

Reverse wealth effect:

answer

if you're holding onto something and it decreases in value, you're less likely to spend (an example is stock)

question

Investment spending:

answer

what businesses spend on new capital goods

question

Investment spending, conceptually, is...

answer

a function of the expected rate of return the businesses want to make on their project (r)

question

Determinants of investment spending:

answer

question

What Is the main thing that causes the ups and downs in a business cycle?

answer

consumer spending + investment spending + government spending + net exports (what foreigners buy)

question

Investment spending changes the most...

answer

from one period to the next

question

Why investment spending so unpredictable:

answer

-Big ticket, all-or-nothing capital items
-Durability
-Variable expectations
-Irregular innovation
-Variable profits

question

Multiplier effect:

answer

any change in spending (consumer, investment, government and net exports) causes a greater change in output/income

question

Formula:

answer

initial change in spending x multiplier

question

Why is actual multiplier lower than predicted

answer

Leakages: savings, taxes, imports

Full strength vs less than full strength multiplier

question

Equilibrium:

answer

when total output or total supply is equal to total spending demand (we only worry about consumer and investment spending)

question

If spending is greater than output...

answer

then output is gonna be pulled up

question

Is spending is less than output,

answer

then producers are going to cut back and produce less

question

Retaliation:

answer

if we do something bad to another country, they'll come back with something worse

question

Recessionary gap:

answer

the fact that the economy come to rest somewhere below the full employment level and the recessionary gap is the difference between a resting economy and GDP

question

Inflationary gap:

answer

when you're at equilibrium AND you're at full employment so spending goes up

question

Classical economists theorized:

answer

Wage price flexibility

Full employment is the normal situation

Say's law's supply creates its own demand

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