Econ 203 Macro Test 2 exam review 2024
What are the characteristics of the consumption function? ** Answ** C = a + b(Y)
a = intercept; autonomous level of consumption
b = slope; mpc; the change in consumption by every $1 increase in income
Y = aggregate output/income
autonomous level of spending ** Answ** change in Y = change in (a) x ( - mpc)
necessary consumption
marginal propensity to consume ** Answ** the ratio of the change in consumption spending to a
given change in income.
MPC = change in C/change in Y
If aggregate output/income increases by 100, how much does consumption increase by? ** Answ**
Total income equation ** Answ** Y = C + S + T
How do you find household savings ** Answ** S = Y - C - T
marginal propensity to saving ** Answ** the percentage of new income that leaves the spending
stream in the form of household saving
MPS = 1 - MPC
MPS = change in savings over change in output (Y) or change in I over change in Y
What's planned investment? Why is it planned/what isn't included? ** Answ** investment that was
planned for the year and does not include anything unplanned
What's the aggregate expenditure? ** Answ** AE = C + I + G
AE = Planned aggregate expenditure = total planned spending on new goods and services in the
economy.
, C = Consumption
I = planned investment from firms
G = government spending
What's the significance of the 45 degree line? ** Answ** AE = Y
total spending = total production
(firms have no incentive to change production)
If AE > Y, what is the unplanned change in inventories? How do firms respond? ** Answ** There is an
unplanned decrease in inventory and firms will increase production
If AE < Y, what is the unplanned changes in inventories? How do firms respond? ** Answ** There is
an unplanned increase in inventory and firms will decrease production
What's the equilibrium level of output? ** Answ** when AE = Y; total spending = total production; Y*
What's a leakage and injection to the spending stream? ** Answ** leakages = injections at
equilibrium level of output
S+T=G+I
saving is a leakage
unplanned investment is an injection
The spending multiplier ** Answ** how much total spending, at any given price level, will change
relative to the initial change in spending
change in I or G x (-(1-t)(mpc))
Why is the spending multiplier smaller in the real world vs our model? ** Answ** 1) Fiscal Drag:
higher taxes when income increases and less government assistance so less spending when income
increases which decreases multiplier
2) capacity constraints: resources are scarce; spending multiplier would give change in equilibrium
output; increase in output is inflationary which slows multiplier
What are the characteristics of the consumption function? ** Answ** C = a + b(Y)
a = intercept; autonomous level of consumption
b = slope; mpc; the change in consumption by every $1 increase in income
Y = aggregate output/income
autonomous level of spending ** Answ** change in Y = change in (a) x ( - mpc)
necessary consumption
marginal propensity to consume ** Answ** the ratio of the change in consumption spending to a
given change in income.
MPC = change in C/change in Y
If aggregate output/income increases by 100, how much does consumption increase by? ** Answ**
Total income equation ** Answ** Y = C + S + T
How do you find household savings ** Answ** S = Y - C - T
marginal propensity to saving ** Answ** the percentage of new income that leaves the spending
stream in the form of household saving
MPS = 1 - MPC
MPS = change in savings over change in output (Y) or change in I over change in Y
What's planned investment? Why is it planned/what isn't included? ** Answ** investment that was
planned for the year and does not include anything unplanned
What's the aggregate expenditure? ** Answ** AE = C + I + G
AE = Planned aggregate expenditure = total planned spending on new goods and services in the
economy.
, C = Consumption
I = planned investment from firms
G = government spending
What's the significance of the 45 degree line? ** Answ** AE = Y
total spending = total production
(firms have no incentive to change production)
If AE > Y, what is the unplanned change in inventories? How do firms respond? ** Answ** There is an
unplanned decrease in inventory and firms will increase production
If AE < Y, what is the unplanned changes in inventories? How do firms respond? ** Answ** There is
an unplanned increase in inventory and firms will decrease production
What's the equilibrium level of output? ** Answ** when AE = Y; total spending = total production; Y*
What's a leakage and injection to the spending stream? ** Answ** leakages = injections at
equilibrium level of output
S+T=G+I
saving is a leakage
unplanned investment is an injection
The spending multiplier ** Answ** how much total spending, at any given price level, will change
relative to the initial change in spending
change in I or G x (-(1-t)(mpc))
Why is the spending multiplier smaller in the real world vs our model? ** Answ** 1) Fiscal Drag:
higher taxes when income increases and less government assistance so less spending when income
increases which decreases multiplier
2) capacity constraints: resources are scarce; spending multiplier would give change in equilibrium
output; increase in output is inflationary which slows multiplier
