ECON 2120 test 2 Questions & Answers
QUESTIONS & ANSWERS
aggregate expenditure model
a macroeconomic model that focuses on the relationship between total spending and real gdp,
assuming the price level is constant
aggregate expenditure
AE = C + I + G + NX
determinants of consumption
1. Current disposable income
2. Household wealth
3. Expected future income
4. The price level
5. The interest rate
determinants of planned investments
1. expectations of future profitability
2. interest rates
3. taxes
4. cash flow
determinants of net exports
, 1. the price level in the US relative to other countries
2. the growth rate of gdp in the US relative to other countries
3. the exchange rate between the dollar and other currencies
an unplanned decrease in inventories
results in increasing production (total spending>production, so inventory going down)
aggregate demand curve
shows the relationship between the price level and the quantity of real gdp demanded by
households, firms, and the government
the AD curve is downward sloping due to
Wealth Effect: Lower prices → higher purchasing power → more spending
Interest Rate Effect: Lower prices → lower interest rates → more borrowing & spending
International Trade Effect: Lower prices → exports ↑, imports ↓ → net exports ↑
increases in AD caused by
dec interest rate, inc gov purchases, dec in taxes, people are optimistic, more economic growth in
other countries faster than US, dollar depreciates
Factors Shifting Aggregate Demand
- Changes in policies (interest rates, government purchases, personal income taxes or business
taxes)
- Changes in the expectations of households and firms
- Changes in foreign variables (income abroad, exchange rates)
QUESTIONS & ANSWERS
aggregate expenditure model
a macroeconomic model that focuses on the relationship between total spending and real gdp,
assuming the price level is constant
aggregate expenditure
AE = C + I + G + NX
determinants of consumption
1. Current disposable income
2. Household wealth
3. Expected future income
4. The price level
5. The interest rate
determinants of planned investments
1. expectations of future profitability
2. interest rates
3. taxes
4. cash flow
determinants of net exports
, 1. the price level in the US relative to other countries
2. the growth rate of gdp in the US relative to other countries
3. the exchange rate between the dollar and other currencies
an unplanned decrease in inventories
results in increasing production (total spending>production, so inventory going down)
aggregate demand curve
shows the relationship between the price level and the quantity of real gdp demanded by
households, firms, and the government
the AD curve is downward sloping due to
Wealth Effect: Lower prices → higher purchasing power → more spending
Interest Rate Effect: Lower prices → lower interest rates → more borrowing & spending
International Trade Effect: Lower prices → exports ↑, imports ↓ → net exports ↑
increases in AD caused by
dec interest rate, inc gov purchases, dec in taxes, people are optimistic, more economic growth in
other countries faster than US, dollar depreciates
Factors Shifting Aggregate Demand
- Changes in policies (interest rates, government purchases, personal income taxes or business
taxes)
- Changes in the expectations of households and firms
- Changes in foreign variables (income abroad, exchange rates)
