Chapter 10 “Aggregate Expenditures”

1 ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e

Chapter 10Chapter 10“Aggregate Expenditures”“Aggregate Expenditures”

Chapter 10Chapter 10“Aggregate Expenditures”“Aggregate Expenditures”

ECONOMICS: ECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

ECONOMICS: ECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

1.1. Summarize the perspective of Summarize the perspective of Keynesian and Keynesian economics.Keynesian and Keynesian economics.

2.2. Illustrate the income-expenditure.Illustrate the income-expenditure.

3.3. Explain the adjustment process to an Explain the adjustment process to an expenditure equilibrium.expenditure equilibrium.

4.4. Describe how new spending can have a Describe how new spending can have a ripple effect throughout the economy.ripple effect throughout the economy.

1.1. Summarize the perspective of Summarize the perspective of Keynesian and Keynesian economics.Keynesian and Keynesian economics.

2.2. Illustrate the income-expenditure.Illustrate the income-expenditure.

3.3. Explain the adjustment process to an Explain the adjustment process to an expenditure equilibrium.expenditure equilibrium.

4.4. Describe how new spending can have a Describe how new spending can have a ripple effect throughout the economy.ripple effect throughout the economy.


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

5.5. Distinguish the types of multipliers in the Distinguish the types of multipliers in the Keynesian model.Keynesian model.

6.6. Graph the relationship of the income-Graph the relationship of the income-expenditure model to aggregate demand.expenditure model to aggregate demand.

7.7. (E&A) Compare economic analyses of the (E&A) Compare economic analyses of the Great Depression.Great Depression.

5.5. Distinguish the types of multipliers in the Distinguish the types of multipliers in the Keynesian model.Keynesian model.

6.6. Graph the relationship of the income-Graph the relationship of the income-expenditure model to aggregate demand.expenditure model to aggregate demand.

7.7. (E&A) Compare economic analyses of the (E&A) Compare economic analyses of the Great Depression.Great Depression.


10.110.1“IN THE LONG RUN, WE ARE ALL DEAD”“IN THE LONG RUN, WE ARE ALL DEAD”10.110.1“IN THE LONG RUN, WE ARE ALL DEAD”“IN THE LONG RUN, WE ARE ALL DEAD”

Keynes chose to ignore long-run tendencies Keynes chose to ignore long-run tendencies toward full employment.toward full employment.

In his view the problems of unemployment could In his view the problems of unemployment could be solved only if people and government would be solved only if people and government would buy more goods and services.buy more goods and services.Consumption spending is 70% of GDP, and it Consumption spending is 70% of GDP, and it

motivates investment spending.motivates investment spending.The Keynesian model is based around The Keynesian model is based around

understanding how much spending is likely to understanding how much spending is likely to occur at different levels of spending, and how occur at different levels of spending, and how government can influence that spending to ensure government can influence that spending to ensure full employment.full employment.

Keynes chose to ignore long-run tendencies Keynes chose to ignore long-run tendencies toward full employment.toward full employment.

In his view the problems of unemployment could In his view the problems of unemployment could be solved only if people and government would be solved only if people and government would buy more goods and services.buy more goods and services.Consumption spending is 70% of GDP, and it Consumption spending is 70% of GDP, and it

motivates investment spending.motivates investment spending.The Keynesian model is based around The Keynesian model is based around

understanding how much spending is likely to understanding how much spending is likely to occur at different levels of spending, and how occur at different levels of spending, and how government can influence that spending to ensure government can influence that spending to ensure full employment.full employment.


10.210.2THE INCOME-EXPENDITURE THE INCOME-EXPENDITURE MODELMODEL

10.210.2THE INCOME-EXPENDITURE THE INCOME-EXPENDITURE MODELMODEL

““One person’s spending is anotherOne person’s spending is anotherperson’s income.”person’s income.”

Aggregate National IncomeAggregate National Income

==

Aggregate National OutputAggregate National Output


The The aggregate expenditures functionaggregate expenditures function tells tells what the economy’s planned spending what the economy’s planned spending will be at each level of real GDP.will be at each level of real GDP.

There will be only one GDP that does There will be only one GDP that does match up planned spending and actual match up planned spending and actual spending.spending.

That GDP occurs at the expenditure That GDP occurs at the expenditure equilibrium, where the AE function and equilibrium, where the AE function and the the 45-degree line intersect. 45-degree line intersect.

The The aggregate expenditures functionaggregate expenditures function tells tells what the economy’s planned spending what the economy’s planned spending will be at each level of real GDP.will be at each level of real GDP.

There will be only one GDP that does There will be only one GDP that does match up planned spending and actual match up planned spending and actual spending.spending.

That GDP occurs at the expenditure That GDP occurs at the expenditure equilibrium, where the AE function and equilibrium, where the AE function and the the 45-degree line intersect. 45-degree line intersect.

The Income –Expenditure ModelThe Income –Expenditure ModelThe Income –Expenditure ModelThe Income –Expenditure Model


Real GDP (income)

Aggregate Expenditure Function

45o: Spending=production

$10trillion

$5 trillion

$10 trillion #1 The aggregateexpenditure functionshows how much the economy plans to spend at each possibleGDP

#3 At the equilibriumvalue of GDP, actual spending equals plannedspending .

#2 The 4-degree lineshows expenditures by repeating to the vertical axis the realGDP listed on the horizontal axis.

The Income –Expenditure ModelThe Income –Expenditure ModelThe Income –Expenditure ModelThe Income –Expenditure ModelE

xpen

dit

ures


Components of Aggregate Components of Aggregate ExpendituresExpenditures


Spending can be divided into two types:Spending can be divided into two types:Autonomous spending:Autonomous spending: spending that spending that

would occur even if people had no income.would occur even if people had no income.Induced spending:Induced spending: spending that depends spending that depends

upon income.upon income.


Autonomous spending includes both Autonomous spending includes both investments and goods.investments and goods.Draw upon previous wealth and savings.Draw upon previous wealth and savings.College students with no earnings drawing College students with no earnings drawing

down their parents bank accounts to pay for down their parents bank accounts to pay for room and board at school.room and board at school.

Graphically, autonomous spending is a Graphically, autonomous spending is a positive amount that shows up as a positive amount that shows up as a horizontal line.horizontal line.

Autonomous spending includes both Autonomous spending includes both investments and goods.investments and goods.Draw upon previous wealth and savings.Draw upon previous wealth and savings.College students with no earnings drawing College students with no earnings drawing

down their parents bank accounts to pay for down their parents bank accounts to pay for room and board at school.room and board at school.

Graphically, autonomous spending is a Graphically, autonomous spending is a positive amount that shows up as a positive amount that shows up as a horizontal line.horizontal line.




Since induced spending is entirely Since induced spending is entirely dependent upon income, graphically it dependent upon income, graphically it starts at zero starts at zero and GDP rises starts at zero starts at zero and GDP rises from there.from there.

When autonomous spending and induced When autonomous spending and induced spending are added together, the result is spending are added together, the result is an aggregate expenditure function that has an aggregate expenditure function that has both a positive vertical intercept, and a both a positive vertical intercept, and a positive slope. positive slope.

Since induced spending is entirely Since induced spending is entirely dependent upon income, graphically it dependent upon income, graphically it starts at zero starts at zero and GDP rises starts at zero starts at zero and GDP rises from there.from there.

When autonomous spending and induced When autonomous spending and induced spending are added together, the result is spending are added together, the result is an aggregate expenditure function that has an aggregate expenditure function that has both a positive vertical intercept, and a both a positive vertical intercept, and a positive slope. positive slope.




Real GDP (income)

$10

trillion

$5 trillion

$10 trillion

Aggregates expenditures includesboth autonomous and induced spending.

Induced spending

00

Autonomous spending

Aggregate Expenditure Function

Expenditures

Aggregate ExpendituresAggregate ExpendituresAggregate ExpendituresAggregate Expenditures


o The components of aggregate expenditures The components of aggregate expenditures are merely the components of GDP.are merely the components of GDP.

GDP = C + I + G + (X-M)GDP = C + I + G + (X-M)

o The consumption function because of The consumption function because of autonomous spending has a positive autonomous spending has a positive vertical intercept.vertical intercept.

o From there, it slopes upward because of From there, it slopes upward because of the the marginal propensity to consume (mpc).marginal propensity to consume (mpc).

o The components of aggregate expenditures The components of aggregate expenditures are merely the components of GDP.are merely the components of GDP.

GDP = C + I + G + (X-M)GDP = C + I + G + (X-M)

o The consumption function because of The consumption function because of autonomous spending has a positive autonomous spending has a positive vertical intercept.vertical intercept.

o From there, it slopes upward because of From there, it slopes upward because of the the marginal propensity to consume (mpc).marginal propensity to consume (mpc).




o The The marginal propensity to consume marginal propensity to consume (MPC)(MPC) is the fraction of additional is the fraction of additional income that people spend.income that people spend.

o The The marginal propensity to save (MPS)marginal propensity to save (MPS) is is the fraction of additional income that the fraction of additional income that people save.people save.

o The The marginal propensity to consume marginal propensity to consume (MPC)(MPC) is the fraction of additional is the fraction of additional income that people spend.income that people spend.

o The The marginal propensity to save (MPS)marginal propensity to save (MPS) is is the fraction of additional income that the fraction of additional income that people save.people save.

MPC + MPS = 1MPC + MPS = 1MPC + MPS = 1MPC + MPS = 1

MPC and MPSMPC and MPSMPC and MPSMPC and MPS


The Aggregate Expenditures The Aggregate Expenditures FunctionFunction

The Aggregate Expenditures The Aggregate Expenditures FunctionFunction

• Investment and government purchases Investment and government purchases are of roughly comparable size.are of roughly comparable size.

• If planned government purchases and If planned government purchases and investment spending are assumed to be investment spending are assumed to be completely autonomous, they will be completely autonomous, they will be constant as GDP changes.constant as GDP changes.

• For this reason, the slope of the AE For this reason, the slope of the AE function and the consumption function function and the consumption function are the same. are the same.

• Investment and government purchases Investment and government purchases are of roughly comparable size.are of roughly comparable size.

• If planned government purchases and If planned government purchases and investment spending are assumed to be investment spending are assumed to be completely autonomous, they will be completely autonomous, they will be constant as GDP changes.constant as GDP changes.

• For this reason, the slope of the AE For this reason, the slope of the AE function and the consumption function function and the consumption function are the same. are the same.


Modeling the Expenditure Modeling the Expenditure EquilibriumEquilibrium


When the economy is not at equilibrium, When the economy is not at equilibrium, actual GDP and planned spending differ.actual GDP and planned spending differ.

Unintended inventory changes show up Unintended inventory changes show up as the difference between planned and as the difference between planned and actual investment.actual investment.




Expenditure equilibrium: Expenditure equilibrium: aggregate expenditures = actual GDPaggregate expenditures = actual GDP

Aggregate expenditures: consumption + planned investmentAggregate expenditures: consumption + planned investment government + net exportsgovernment + net exports

GDP = consumption + actual investment GDP = consumption + actual investment + government +net exports+ government +net exports

Expenditure equilibrium: Expenditure equilibrium: planned investment = actual investmentplanned investment = actual investment

wherewhere

andand

whichwhichimpliesimplies


Real GDP (income)

ExpendituresExpenditures Aggregate Expenditure Function

45o: Spending=production

#2 A progression of inventory#2 A progression of inventorybuildups less production buildups less production leads to leads to the expenditures equilibriumthe expenditures equilibriumhere.here.

#1 if the economy#1 if the economy starts herestarts here

Output decreasesbut at a decreasing rate.

Modeling the Expenditure EquilibriumModeling the Expenditure EquilibriumModeling the Expenditure EquilibriumModeling the Expenditure Equilibrium


10.310.3CHANGING THE EXPENDITURE CHANGING THE EXPENDITURE EQUILIBRIUMEQUILIBRIUM

When there are changes in autonomous When there are changes in autonomous spending, the changes are magnified by the spending, the changes are magnified by the multiplier effect.multiplier effect.

Adding autonomous spending causes a higher Adding autonomous spending causes a higher GDP, which causes more induced spending.GDP, which causes more induced spending.

That’s because money that one person spends That’s because money that one person spends autonomously adds to income of others, which in autonomously adds to income of others, which in turn induces them to buy more output.turn induces them to buy more output.

At each stage in this cycle, however, some income At each stage in this cycle, however, some income is saved, thus eventually bringing the cycle to a is saved, thus eventually bringing the cycle to a halt.halt.

When there are changes in autonomous When there are changes in autonomous spending, the changes are magnified by the spending, the changes are magnified by the multiplier effect.multiplier effect.

Adding autonomous spending causes a higher Adding autonomous spending causes a higher GDP, which causes more induced spending.GDP, which causes more induced spending.

That’s because money that one person spends That’s because money that one person spends autonomously adds to income of others, which in autonomously adds to income of others, which in turn induces them to buy more output.turn induces them to buy more output.

At each stage in this cycle, however, some income At each stage in this cycle, however, some income is saved, thus eventually bringing the cycle to a is saved, thus eventually bringing the cycle to a halt.halt.


Real GDP (income)

The multiplier effect causes a small The multiplier effect causes a small increase in autonomous expenditures to increase in autonomous expenditures to have a much larger effect on GDP.have a much larger effect on GDP.

Increase in autonomous expenditures

Increase in GDP

The expenditureThe expenditureequilibrium movesequilibrium moveshigherhigher

Aggregateexpenditure function

Expenditures

The Multiplier EffectThe Multiplier EffectThe Multiplier EffectThe Multiplier Effect


The strength of the multiplier effect The strength of the multiplier effect depends upon the proportion of income depends upon the proportion of income that is devoted to consumption.that is devoted to consumption.To the extent that people save their To the extent that people save their incomes, savings represents a leakage out incomes, savings represents a leakage out of the multiplier process.of the multiplier process.A negative value for savings means that A negative value for savings means that there is there is dissavingdissaving – spending out of – spending out of existing savings.existing savings.

The strength of the multiplier effect The strength of the multiplier effect depends upon the proportion of income depends upon the proportion of income that is devoted to consumption.that is devoted to consumption.To the extent that people save their To the extent that people save their incomes, savings represents a leakage out incomes, savings represents a leakage out of the multiplier process.of the multiplier process.A negative value for savings means that A negative value for savings means that there is there is dissavingdissaving – spending out of – spending out of existing savings.existing savings.



Spending Depends upon the Marginal Spending Depends upon the Marginal Propensity to Consume (mpc):Propensity to Consume (mpc):Spending Depends upon the Marginal Spending Depends upon the Marginal Propensity to Consume (mpc):Propensity to Consume (mpc):

Income Spending Savings

$0 $1,000 -$1,000$1,000 $1,600 -$600$2,000 $2,200 -$200$3,000 $2,800 $200$4,000 $3,400 $600$5,000 $4,000 $1,000


The Expenditure MultiplierThe Expenditure MultiplierThe Expenditure MultiplierThe Expenditure Multiplier

Expenditure multiplier = 1/mpsExpenditure multiplier = 1/mpsor or

1/(1-MPC)1/(1-MPC)

Expenditure multiplier = 1/mpsExpenditure multiplier = 1/mpsor or

1/(1-MPC)1/(1-MPC)

Autonomous spending x 1/mpsAutonomous spending x 1/mps Autonomous spending x 1/mpsAutonomous spending x 1/mps

Expenditure equilibriumExpenditure equilibrium Expenditure equilibriumExpenditure equilibrium====


The multiplier is multiplied by a change The multiplier is multiplied by a change in autonomous spending to reveal the in autonomous spending to reveal the change in equilibrium GDP.change in equilibrium GDP.

There must be some idle resources for There must be some idle resources for the multiplier effect to occur.the multiplier effect to occur.

Keynesian multiplier analysis assumes a Keynesian multiplier analysis assumes a constant price level.constant price level.

The multiplier is multiplied by a change The multiplier is multiplied by a change in autonomous spending to reveal the in autonomous spending to reveal the change in equilibrium GDP.change in equilibrium GDP.

There must be some idle resources for There must be some idle resources for the multiplier effect to occur.the multiplier effect to occur.

Keynesian multiplier analysis assumes a Keynesian multiplier analysis assumes a constant price level.constant price level.



Recession and Inflation within the Recession and Inflation within the Income-Expenditure ModelIncome-Expenditure Model


If the expenditure equilibrium lies below full-If the expenditure equilibrium lies below full-employment GDP, it is called an employment GDP, it is called an unemployment unemployment equilibrium.equilibrium.

Along with the unemployment equilibrium Along with the unemployment equilibrium comes an comes an output gapoutput gap, in which actual GDP falls , in which actual GDP falls below full-employment GDP.below full-employment GDP.At an unemployment equilibrium, there is to At an unemployment equilibrium, there is to

little spending for the economy to achieve little spending for the economy to achieve full employment GDP.full employment GDP.

If the expenditure equilibrium lies below full-If the expenditure equilibrium lies below full-employment GDP, it is called an employment GDP, it is called an unemployment unemployment equilibrium.equilibrium.

Along with the unemployment equilibrium Along with the unemployment equilibrium comes an comes an output gapoutput gap, in which actual GDP falls , in which actual GDP falls below full-employment GDP.below full-employment GDP.At an unemployment equilibrium, there is to At an unemployment equilibrium, there is to





If the expenditure equilibrium lies below full-If the expenditure equilibrium lies below full-employment GDP, it is called an unemployment employment GDP, it is called an unemployment equilibrium.equilibrium.

Along with the unemployment equilibrium Along with the unemployment equilibrium comes an output gap, in which actual GDP falls comes an output gap, in which actual GDP falls below full-employment GDP.below full-employment GDP.At an unemployment equilibrium, there is to At an unemployment equilibrium, there is to


If the expenditure equilibrium lies below full-If the expenditure equilibrium lies below full-employment GDP, it is called an unemployment employment GDP, it is called an unemployment equilibrium.equilibrium.

Along with the unemployment equilibrium Along with the unemployment equilibrium comes an output gap, in which actual GDP falls comes an output gap, in which actual GDP falls below full-employment GDP.below full-employment GDP.At an unemployment equilibrium, there is to At an unemployment equilibrium, there is to


The shortfallThe shortfall in spendingin spending

is called ais called a recessionary gap.recessionary gap.


If the expenditure equilibrium occurs past If the expenditure equilibrium occurs past the full-employment GDP, multiplier the full-employment GDP, multiplier analysis does not apply, because inflation analysis does not apply, because inflation will not allow it to stay there.will not allow it to stay there.

This possibility is referred to as an This possibility is referred to as an inflationary gapinflationary gap,, which is the excess of the which is the excess of the aggregate expenditure function above that aggregate expenditure function above that consistent with a full employment consistent with a full employment equilibrium.equilibrium.

If the expenditure equilibrium occurs past If the expenditure equilibrium occurs past the full-employment GDP, multiplier the full-employment GDP, multiplier analysis does not apply, because inflation analysis does not apply, because inflation will not allow it to stay there.will not allow it to stay there.

This possibility is referred to as an This possibility is referred to as an inflationary gapinflationary gap,, which is the excess of the which is the excess of the aggregate expenditure function above that aggregate expenditure function above that consistent with a full employment consistent with a full employment equilibrium.equilibrium.




Making Policy with MultipliersMaking Policy with MultipliersMaking Policy with MultipliersMaking Policy with Multipliers

• Keynesian analysis suggest that govern can use Keynesian analysis suggest that govern can use taxes to stimulate the economy.taxes to stimulate the economy.

• However people might save some of their However people might save some of their higher after tax income rather than spend it. higher after tax income rather than spend it. The The tax multiplier,tax multiplier, which is the expansionary, which is the expansionary, or contractionary effect of a tax cut, or increase or contractionary effect of a tax cut, or increase would be less than the multiplier by the amount would be less than the multiplier by the amount of the initial round of spending.of the initial round of spending.

• Keynesian analysis suggest that govern can use Keynesian analysis suggest that govern can use taxes to stimulate the economy.taxes to stimulate the economy.

• However people might save some of their However people might save some of their higher after tax income rather than spend it. higher after tax income rather than spend it. The The tax multiplier,tax multiplier, which is the expansionary, which is the expansionary, or contractionary effect of a tax cut, or increase or contractionary effect of a tax cut, or increase would be less than the multiplier by the amount would be less than the multiplier by the amount of the initial round of spending.of the initial round of spending.



Tax Multiplier = -mpc/(1-mpc)Tax Multiplier = -mpc/(1-mpc)


Balanced Budget MultiplierBalanced Budget MultiplierBalanced Budget MultiplierBalanced Budget Multiplier

• Keynesians view extra government Keynesians view extra government spending as the most effective policy to spending as the most effective policy to cure a recession.cure a recession.

• The The balanced-budget multiplierbalanced-budget multiplier combines combines the expenditure multiplier for an the expenditure multiplier for an increase in government spending and the increase in government spending and the tax multiplier because taxes would tax multiplier because taxes would increase to finance that spending.increase to finance that spending.

• Keynesians view extra government Keynesians view extra government spending as the most effective policy to spending as the most effective policy to cure a recession.cure a recession.

• The The balanced-budget multiplierbalanced-budget multiplier combines combines the expenditure multiplier for an the expenditure multiplier for an increase in government spending and the increase in government spending and the tax multiplier because taxes would tax multiplier because taxes would increase to finance that spending.increase to finance that spending.



Balanced Budget Multiplier =Balanced Budget Multiplier = 1/(1-mpc) – mpc/(1-mpc)=1/(1-mpc) – mpc/(1-mpc)=(1-mpc)/(1-mpc)=1(1-mpc)/(1-mpc)=1


10.4 AGGREGATE DEMAND

Actual Real GDP (income)

Exp

end

itur

es45o: Spending=production Aggregate Expenditures

with lower price level P1

P1

P2

Real GDP

Aggregate Expenditures with higher price level P2

GDP1GDP2

Pri

ce L

evel

Aggregate Demand


10.5 EXPLORE & APPLYThe Great Depression

10.5 EXPLORE & APPLYThe Great Depression

The 1920’s era of prosperity peaked in early The 1920’s era of prosperity peaked in early 1929.1929. A few months later the stock market A few months later the stock market

crashed.crashed. The Great Depression began and did not end The Great Depression began and did not end

for over a decade.for over a decade. Keynesian aggregate expenditure analysis can Keynesian aggregate expenditure analysis can

be used to describe the depression and the be used to describe the depression and the policy action to correct it. policy action to correct it.

The 1920’s era of prosperity peaked in early The 1920’s era of prosperity peaked in early 1929.1929. A few months later the stock market A few months later the stock market

crashed.crashed. The Great Depression began and did not end The Great Depression began and did not end

for over a decade.for over a decade. Keynesian aggregate expenditure analysis can Keynesian aggregate expenditure analysis can

be used to describe the depression and the be used to describe the depression and the policy action to correct it. policy action to correct it.


Terms Along the WayTerms Along the WayTerms Along the WayTerms Along the Way

income-expenditures income-expenditures modelmodel

aggregate aggregate expendituresexpenditures

aggregate aggregate expenditures expenditures functionfunction

expenditure expenditure equilibriumequilibrium

income-expenditures income-expenditures modelmodel

aggregate aggregate expendituresexpenditures

aggregate aggregate expenditures expenditures functionfunction

expenditure expenditure equilibriumequilibrium

autonomous autonomous spendingspending

induced spendinginduced spendingconsumption consumption

function function marginal propensity marginal propensity

to consumeto consumemarginal propensity marginal propensity

to saveto save

autonomous autonomous spendingspending

induced spendinginduced spendingconsumption consumption

function function marginal propensity marginal propensity

to consumeto consumemarginal propensity marginal propensity

to saveto save


Terms Along the WayTerms Along the WayTerms Along the WayTerms Along the Way

multiplier effectmultiplier effectexpenditure expenditure

multipliermultiplierunemployment unemployment

equilibriumequilibriumoutput gapoutput gap

multiplier effectmultiplier effectexpenditure expenditure

multipliermultiplierunemployment unemployment

equilibriumequilibriumoutput gapoutput gap

recessionary gaprecessionary gap inflationary gapinflationary gaptax multipliertax multiplierbalanced budget balanced budget

multipliermultiplier

recessionary gaprecessionary gap inflationary gapinflationary gaptax multipliertax multiplierbalanced budget balanced budget

multipliermultiplier


Test YourselfTest YourselfTest YourselfTest Yourself

1.1. John Maynard Keynes offered a long-run John Maynard Keynes offered a long-run perspective on the macro-economy in the general perspective on the macro-economy in the general theory.theory.

a.a. If you had no income you could still engage in induced If you had no income you could still engage in induced spending.spending.

b.b. The marginal propensity to consume must be 1 or less.The marginal propensity to consume must be 1 or less.c.c. An expenditure equilibrium occurs where the aggregate An expenditure equilibrium occurs where the aggregate

expenditure function intersects the vertical axis.expenditure function intersects the vertical axis.d.d. An injection of new autonomous spending will leave An injection of new autonomous spending will leave

equilibrium real GDP unchanged when the marginal equilibrium real GDP unchanged when the marginal propensity to save equals 0.5.propensity to save equals 0.5.

1.1. John Maynard Keynes offered a long-run John Maynard Keynes offered a long-run perspective on the macro-economy in the general perspective on the macro-economy in the general theory.theory.

a.a. If you had no income you could still engage in induced If you had no income you could still engage in induced spending.spending.

b.b. The marginal propensity to consume must be 1 or less.The marginal propensity to consume must be 1 or less.c.c. An expenditure equilibrium occurs where the aggregate An expenditure equilibrium occurs where the aggregate

expenditure function intersects the vertical axis.expenditure function intersects the vertical axis.d.d. An injection of new autonomous spending will leave An injection of new autonomous spending will leave

equilibrium real GDP unchanged when the marginal equilibrium real GDP unchanged when the marginal propensity to save equals 0.5.propensity to save equals 0.5.



2.2. Suppose actual spending equals planned Suppose actual spending equals planned spending. Then we can sayspending. Then we can say

a.a. the economy is at an expenditure the economy is at an expenditure equilibrium.equilibrium.

b.b. real GDP is the most it can possibly be.real GDP is the most it can possibly be.c.c. autonomous spending equals zero.autonomous spending equals zero.d.d. aggregate demand has shifted to the left.aggregate demand has shifted to the left.

2.2. Suppose actual spending equals planned Suppose actual spending equals planned spending. Then we can sayspending. Then we can say

a.a. the economy is at an expenditure the economy is at an expenditure equilibrium.equilibrium.

b.b. real GDP is the most it can possibly be.real GDP is the most it can possibly be.c.c. autonomous spending equals zero.autonomous spending equals zero.d.d. aggregate demand has shifted to the left.aggregate demand has shifted to the left.



3.3. In the income expenditures model the In the income expenditures model the 45-degree line shows45-degree line shows

a.a. the amount of autonomous spending.the amount of autonomous spending.

b.b. the amount of induced spending.the amount of induced spending.

c.c. the expenditure multiplier.the expenditure multiplier.

d.d. that the economy’s expenditures are that the economy’s expenditures are actually the same as its output. .actually the same as its output. .

3.3. In the income expenditures model the In the income expenditures model the 45-degree line shows45-degree line shows

a.a. the amount of autonomous spending.the amount of autonomous spending.

b.b. the amount of induced spending.the amount of induced spending.

c.c. the expenditure multiplier.the expenditure multiplier.

d.d. that the economy’s expenditures are that the economy’s expenditures are actually the same as its output. .actually the same as its output. .



4.4. Aggregate expenditures include all of Aggregate expenditures include all of the following exceptthe following except

a.a. consumption.consumption.

b.b. planned investment.planned investment.

c.c. net exports.net exports.

d.d. unintended changes in business unintended changes in business inventories.inventories.

4.4. Aggregate expenditures include all of Aggregate expenditures include all of the following exceptthe following except

a.a. consumption.consumption.

b.b. planned investment.planned investment.

c.c. net exports.net exports.

d.d. unintended changes in business unintended changes in business inventories.inventories.



5.5. The marginal propensity to consume equalsThe marginal propensity to consume equals

a.a. the fraction of their total income that people the fraction of their total income that people consume.consume.

b.b. the fraction of additional income that people the fraction of additional income that people consume.consume.

c.c. the fraction of their savings that people plan the fraction of their savings that people plan to spend within the next year.to spend within the next year.

d.d. one in most cases..one in most cases..

5.5. The marginal propensity to consume equalsThe marginal propensity to consume equals

a.a. the fraction of their total income that people the fraction of their total income that people consume.consume.

b.b. the fraction of additional income that people the fraction of additional income that people consume.consume.

c.c. the fraction of their savings that people plan the fraction of their savings that people plan to spend within the next year.to spend within the next year.

d.d. one in most cases..one in most cases..



6.6. The paradox of thrift, if true suggest The paradox of thrift, if true suggest that people shouldthat people should

a.a. save more.save more.

b.b. spend more.spend more.

c.c. vote more often.vote more often.

d.d. spend the same amount of money, but spend the same amount of money, but spend it more wisely.spend it more wisely.

6.6. The paradox of thrift, if true suggest The paradox of thrift, if true suggest that people shouldthat people should

a.a. save more.save more.

b.b. spend more.spend more.

c.c. vote more often.vote more often.

d.d. spend the same amount of money, but spend the same amount of money, but spend it more wisely.spend it more wisely.


The End!The End!Next Chapter 11Next Chapter 11““Fiscal Policy in Fiscal Policy in

Action"Action"

Documents

Chapter 10 “Aggregate Expenditures”