Exam 13: Consumption and the Aggregate Expenditures Model

Using the aggregate expenditures model, which of the following occurs if aggregate expenditures fall short of real GDP? I. Actual investment exceeds planned investment. II. Unemployment rises. III. The price level will fall. IV. The economy will experience a recessionary gap.

Use the following to answer questions . Exhibit: Aggregate Expenditures (AE) in a Simplified Economy -(Exhibit: Aggregate Expenditures (AE) in a Simplified Economy) Consider a simple economy that is made up of only two sectors, households and firms, and that investment is autonomous. Further, disposable personal income = real GDP. Suppose that actual real GDP in this economy is $300 billion in a particular period. We would expect to see

Holding all else constant, a change in autonomous aggregate expenditures will shift in aggregate demand by an amount equal to

The amount of consumption that would take place if real GDP were zero is called

An increase in the price level, all other things unchanged, shifts the aggregate expenditures curve upwards.

Use the following to answer questions . Exhibit: Aggregate Expenditures and Real GDP 1 -(Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P. I_P is autonomous and the consumption function is C = $1,000 billion + 0.5Y. What is the amount of consumption when real GDP is $6,000 billion?

The consumption function shows

Consider a simple economy that is made up of three sectors: households, firms, and government. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. In this case, the slope of the aggregate expenditures curve is

An increase in wealth is likely to shift the consumption function curve upward.

In the aggregate expenditures model, in equilibrium,

In the aggregate expenditures model, in equilibrium,

Personal saving is disposable personal income not spent on consumption.

May has been holding her retirement savings in a safe in her house. If the economy is currently experiencing a falling price level,

Use the following to answer questions . Exhibit: Aggregate Expenditures and Real GDP 2 -(Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment and Y* = equilibrium real GDP. Suppose AE = C + I_P, I_P is autonomous and the consumption function is C = $1,000 billion + 0.75Y. If firms produced a real GDP less than the Y*,

Use the following to answer questions . Exhibit: Real GDP and the Multiplier -(Exhibit: Real GDP and the Multiplier) If government purchases increase by $100 billion, the aggregate expenditures curve will shift up by $_______ billion.

A change in aggregate demand causes a change in income, which in turn induces a change in consumption.

Use the following to answer questions . Exhibit: Real GDP and the Multiplier -(Exhibit: Real GDP and the Multiplier) Holding everything else constant, if government purchases increase by $100 billion, equilibrium real GDP will increase by

Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. The marginal propensity to consume is 0.8. Suppose the equilibrium level of real GDP at the prevailing price is $500 billion below potential real GDP. All else constant, by how much should autonomous aggregate expenditures be increased to reach potential output?

The smaller the marginal propensity to consume,

Use the following to answer questions . Exhibit: Aggregate Expenditures (AE) in a Simplified Economy -(Exhibit: Aggregate Expenditures (AE) in a Simplified Economy) Consider a simple economy that is made up of only two sectors, households and firms, and that investment is autonomous. Further, disposable personal income = real GDP. Suppose that actual real GDP in this economy is $500 billion in a particular period. We would expect to see