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
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
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller smartchoices. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $8.49. You're not tied to anything after your purchase.
