question
What is equilibrium
answer
a point of balance, a point from which there is no tendency to move.
in economics this is the level of income and expenditures that the economy tends to move towards and remain at until autonomous spending changes. However, when plans and reality dont match, people adjust to make match and equilibrium changes
in economics this is the level of income and expenditures that the economy tends to move towards and remain at until autonomous spending changes. However, when plans and reality dont match, people adjust to make match and equilibrium changes
question
what is planned spending (expenditures)
answer
-measured by aggregate expenditure function
-PLANNED expenditures at different level of incomes
-this is what used to determine equilibrium however sometimes does not match up with real GDP. Businesses use to determine output, but sometimes wrong
-PLANNED expenditures at different level of incomes
-this is what used to determine equilibrium however sometimes does not match up with real GDP. Businesses use to determine output, but sometimes wrong
question
what is actual spending (expenditures)
answer
-equals real gdp (output)
-is able to because it reflect inventories
-is able to because it reflect inventories
question
...
answer
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question
when planned spending on goods and services exceed the current value of output, the production of goods and services start to
(people are spending more than what is outputted)
(people are spending more than what is outputted)
answer
increase
-only way for business to keep up is to sell inventories
-when inventories start to decrease than production begins to increase to meet demand
-only way for business to keep up is to sell inventories
-when inventories start to decrease than production begins to increase to meet demand
question
...
answer
...
question
the change inventories offset the excess of planned expenditures over real gdp, so that actual expenditures=
answer
real gdp
question
...
answer
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question
when aggregate expenditures exceed real gdp (output), real gdp_____?
answer
rises
when inventories fall, manufactories increase production to meet demand for the product.
when inventories fall, manufactories increase production to meet demand for the product.
question
when aggregate expenditures are less than real gdp, real gdp______?
answer
falls
when inventories are accumulating above planned level-more goods and services are produced then being purchased. Inventories rise, businesses begin to reduce output.
when inventories are accumulating above planned level-more goods and services are produced then being purchased. Inventories rise, businesses begin to reduce output.
question
the equilibrium level of real gdp is where aggregate expenditures _______ real gdp
answer
equal real gdp
this is where there is no changes. This means that planned spending equals
this is where there is no changes. This means that planned spending equals
question
How to determine the equilibrium level of real gdp graph
answer
at line=equilibrium (shows all possible points were aggregate expenditures equal real gdp
when AE lies above line=aggregate expenditures are greater than real gdp. real gdp rises the equilibrium level
when AE curve lie bellow line=aggregate expenditures are less than real gdp. this pushes real gdp down
when AE lies above line=aggregate expenditures are greater than real gdp. real gdp rises the equilibrium level
when AE curve lie bellow line=aggregate expenditures are less than real gdp. this pushes real gdp down
question
what are the two ways that equilibrium can be measured?
answer
1. using aggregate expenditures (spending) and real gdp (output)
2. leakages (reduced GDP, take money out of system) and injections (increase GDP, put money into system)
2. leakages (reduced GDP, take money out of system) and injections (increase GDP, put money into system)
question
leakages
answer
money that flows out of the economy
reduce autonomous aggregate expenditures
reduce autonomous aggregate expenditures
question
The three leakages in the stream of domestic income to spending:
answer
1. savings-more house holds save the less that they spend. a decrease in autonomous consumption=equilibrium level of real gdp to fall
2.taxes-are involuntary reduction of consumption. higher taxes lower autonomous consumption=equilibrium level of real gdp falls
3.imports-spending for foreign goods and services. this reduces spending on domestic goods and services. more imports bought=reduce net exports=equilibrium level of real gdp falls
2.taxes-are involuntary reduction of consumption. higher taxes lower autonomous consumption=equilibrium level of real gdp falls
3.imports-spending for foreign goods and services. this reduces spending on domestic goods and services. more imports bought=reduce net exports=equilibrium level of real gdp falls
question
how are leakages off set by injections
answer
household savings (leakage)= Investments (borrow money for business to spend (injections)
Taxes (leakage)= government purchases (injections)
Imports (leakage)= exports, things in our country bought by other countries (injections)
Taxes (leakage)= government purchases (injections)
Imports (leakage)= exports, things in our country bought by other countries (injections)
question
1. what decreases autonomous aggregate expenditures (spending)
2. what increases autonomous aggregate expenditures (spending)
2. what increases autonomous aggregate expenditures (spending)
answer
1. leakages (savings, taxes, imports)
2. injections (investments, government spending, exports)
2. injections (investments, government spending, exports)
question
the equilibrium level of real gdp occurs when _____ equals ________
answer
leakages, injections
injections will not match corresponding leakage however overall leakages must match injections
injections will not match corresponding leakage however overall leakages must match injections
question
How to determine the equilibrium level of real GDP using leakage and injection chart
(209)
(209)
answer
...
question
1. injections (in) greater than leakages (out) =
2. leakages (out) greater than injections (in)=
3. injections (in) equal leakages (out)=
2. leakages (out) greater than injections (in)=
3. injections (in) equal leakages (out)=
answer
1. planned spending > current gdp (output) =real gdp rises
2. planned spending < current gdp (output) = real gdp lowers
3. real gdp established, no need to move
2. planned spending < current gdp (output) = real gdp lowers
3. real gdp established, no need to move
question
equilibrium is the point where aggregate expenditures (spending) = to
answer
real gdp (output)
question
if autonomous expenditures increase, then real gdp increases. by how much?
answer
-real gdp output increases by more than equal.
***any changes in autonomous expenditure is multiplied into a larger change in equilibrium real gdp
***any changes in autonomous expenditure is multiplied into a larger change in equilibrium real gdp
question
when someone income increases, so does their consumption. example, they now spend more money on hamburgers. now the producer of the hamburger makes more money
answer
...
question
To find the total effects of initial changes in spending
MPC .70 (fraction of what spent of income)
MPI .10 (what part of income is spend on imports)
what is spent on domestic goods and services
MPC .70 (fraction of what spent of income)
MPI .10 (what part of income is spend on imports)
what is spent on domestic goods and services
answer
.60, 60%
question
the percentage of a change in income that is spent domestically is the difference between ___ and the ____
answer
MPC, MPI
question
you get $20
MPC .70
MPI .10
what is the changes on domestic goods and services
MPC .70
MPI .10
what is the changes on domestic goods and services
answer
20 x .6 = you spend $12 on goods and services
$6 saved
$2 imports
$12 consumption
$6 saved
$2 imports
$12 consumption
question
what happens to the $12 that has now become income for another store:
answer
$12 (income) X .60 (what they will spend)= $7.20
$7.20 consumption (put back into economy)
$7.20 consumption (put back into economy)
question
how do you find the total effects of initial change in spending of $20
answer
Spending Multiplier
question
spending multiplier
answer
a measure of the change in equilibrium income or real gdp produced by a change in autonomous expenditures
Multiplier= 1/leakage
= 1/ mps+mpi
-leakages-what is saved (mps)
-mps- portion of income that is saved
-mpi- income spent on imports
Multiplier= 1/leakage
= 1/ mps+mpi
-leakages-what is saved (mps)
-mps- portion of income that is saved
-mpi- income spent on imports
question
mps .30
mpi= .10
change in expenditure $20
what results in the total change in real gdp
mpi= .10
change in expenditure $20
what results in the total change in real gdp
answer
1/ (.3+.1) .4 = 2.5
$20 x 2.5 = $50
$20 x 2.5 = $50
question
the greater the leakage, the smaller the
answer
multiplier
-more people save and the more that is spent on imports the less of expansionary effect the income of change is on spending
-multiplier would be largest in an enclosed economy= because then cant trade with the rest of the world
-more people save and the more that is spent on imports the less of expansionary effect the income of change is on spending
-multiplier would be largest in an enclosed economy= because then cant trade with the rest of the world
question
when an economy operates at natural rate of unemployment, the corresponding level of out put (and income) is called
answer
potential real gDP
question
if we know the size of gdp gap and we know the size of spending multiplier we can determine by how much spending needs to change in order to
answer
yield equilibrium at potential real gdp
-gdp gap=potential real gdp -actual real gdp
-gdp gap=potential real gdp -actual real gdp
question
1. real gdp < potential real gdp
answer
1. gdp gap is the amount that gdp must rise to reach potential
question
potential real gdp= $500
economies equilibrium is $300
how much must gdp rise to meet the equilibrium?
how much must spending rise to meet equilibrium?
economies equilibrium is $300
how much must gdp rise to meet the equilibrium?
how much must spending rise to meet equilibrium?
answer
$200
see bellow
see bellow
question
recessionary gap
answer
the increase in expenditures required to reach potential gdp
gdp/spending multiplier
gdp/spending multiplier
question
ON a graph how to find
1. gdp gap
gdp gap= $200
2. recessionary gap
$80
page 214
1. gdp gap
gdp gap= $200
2. recessionary gap
$80
page 214
answer
1. potential-actual real gdp, (horizontal distance between equilibrium - potential on graph)
2. vertical distance between aggregate expenditure and 45' line at potential real gdp level
$200/2.5=$80
2. vertical distance between aggregate expenditure and 45' line at potential real gdp level
$200/2.5=$80
question
how can the government policy help to closing gap
answer
increase in government expenditures that equals the recessionary gap. which would move the economy to the potential level of real gdp
question
the spending multiplier is simplified... some of the other factors that can effect the multiplier are:
answer
-if prices rise, as spending rises(multiplier results wont be as large as what is says)
-taxes are not considered in spending multiplier and will make it so not spend as much
-if countries imports are very important in determining the volume of exports , underestimates multiplier effect
-taxes are not considered in spending multiplier and will make it so not spend as much
-if countries imports are very important in determining the volume of exports , underestimates multiplier effect
question
imports brought into the usa play a big role in determining real gdp of
answer
magor trading partners
example-the usa buys 80% of ca and mexico exports.
example-the usa buys 80% of ca and mexico exports.
question
how does the spending multiplier underestimate imports
answer
because some imports money that leaves the country come back to the country in the form of export money
question
multiplier estimates
answer
...
question
keynesian model
answer
is a fixed price model (a problem because in the real world often when shortage of goods/services=are met by rising prices, not just production.
-horizontal aggregate supply curve
-horizontal aggregate supply curve
question
what are the ways that the AE curve can shift?
answer
~will shift with changes in the price level because of the following non income determinants:
1. wealth effect- (determinant of consumption spending)price level falls when purchasing power rises. Price level rises when purchasing power of money falls
2. interest rate effect- (determinant of investment spending) when interest level rise=less investment spending
3. net exports- domestic prices rise over foreign prices=domestic goods more expensive= net exports and spending fall
1. wealth effect- (determinant of consumption spending)price level falls when purchasing power rises. Price level rises when purchasing power of money falls
2. interest rate effect- (determinant of investment spending) when interest level rise=less investment spending
3. net exports- domestic prices rise over foreign prices=domestic goods more expensive= net exports and spending fall
question
aggregate demand curve shows how equilibrium level of expenditure changes as the ___ level changes
answer
price
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answer
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answer
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