1、 AnalyticBlooms: Remember2. There are many possible examples. Goods that are standardized and are bought and sold in large quantities, such as wheat or other commodities, tend to have rapidly adjusting prices since the benefits of setting up active auction markets for such goods usually exceeds the
2、costs. Goods such as dresses or skirts, which are not standardized (they vary in size, color, style) and which are usually sold in retail stores one by one, tend to have prices that are changed less frequently.(LO1) Understand3. Planned aggregate expenditure (PAE) is the total planned spending on fi
3、nal goods and services. It consists of consumption spending, investment spending, and government purchases of goods and services, and net exports (exports less imports).A change in output alters the income received by producers, which in turn affects consumption spending through the consumption func
4、tion. Since consumption is the largest component of PAE, changes in output lead to changes in PAE.(LO2) Analyze4. Planned spending includes planned additions to inventories to firms. When firms actual sales differ from planned sales, the resulting changes to inventory will differ from what was plann
5、ed, and actual spending will differ from planned spending. For example, suppose a firm planned to produce 100 units, sell 90 units to the public, and add 10 units to its inventory. But the firm sells only 80 units and thus must add 20 units to inventory. The firms planned inventory investment (a com
6、ponent of planned investment and thus total planned spending) was 10 units, but its actual inventory investment was 20 units. So the firms actual investment spending (inclusive of inventory investment) is greater than it planned. On the other hand, if the firm sold all 100 units, it would add nothin
7、g to inventory, and its actual investment (including inventory investment) would be less than planned.5. Figure 18.2 shows a consumption function. Consumption, (C), is on the vertical axis and disposable income, (Y T), is on the horizontal axis. a. A movement from left to right along the consumption
8、 function shows that consumption increases as disposable income increases.b. A parallel shift upward of the consumption function indicates that people are consuming more at any given level of disposable income. This implies that some factor other than a change in disposable income, autonomous consum
9、ption, is stimulating consumption such as the wealth effect or changes in the interest rate and/or expectations on future income.6. Figure 18.4 shows the Keynesian cross diagram. The 45-degree line captures the definition of short-run equilibrium output, Y = PAE; this implies that the short-run equi
10、librium output must lie on this line. The flatter line, the expenditure line, shows how planned aggregate expenditure depends on output. Because increased output raises disposable income, which in turn increases consumption and planned aggregate expenditure, the expenditure line is upward sloping. A
11、utonomous expenditure is given by the intercept of the expenditure line, the marginal propensity to consume equals the slope of the expenditure line, and short-run equilibrium output is the point on the horizontal axis corresponding to the intersection of the expenditure line and the Y = PAE line. T
12、o find induced expenditure, draw a horizontal line from the intersection of Y = PAE and the expenditure line to the vertical axis. The difference between the resulting point on the vertical axis (which equals actual expenditure) and the intercept of the expenditure line (which equals autonomous expe
13、nditure) equals induced expenditure.(LO3)7. The main reason for the 2007-2009 recession was the bursting of the bubble in the United States housing market in the summer of 2006, causing both households and businesses to reduce their spending. For households this meant both a reduction in the value o
14、f one of the most commonly held assets (wealth effect) and increased uncertainty about the future, reducing consumers willingness to spend at each level of disposable income (a fall in). For businesses, the disruption in financial markets led to a credit crunch, where it was almost impossible for fi
15、rms to borrow funds for investment spending, thereby reducing planned investment. Each of these leads to a reduction in autonomous expenditure. Graphically, a decline in autonomous expenditure shifts the expenditure line downward and lowers short-run equilibrium output below potential output so that
16、 a recessionary gap is created. (See Figure 18.5 for an illustration.)(LO3, LO4) Apply8. The multiplier tells us the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output. The multiplier is greater than one because a one-unit increase in autonomous expenditure direc
17、tly increases output by one unit and increases producers incomes by one unit. The increase in income leads to further spending on the part of producers, which raises income of other producers and subsequently increases their spending. This multiple-round process of spending and income creation leads
18、 to a final increase in output that is greater than the one-unit initial impact.(LO4)9. The increase in government purchases raises autonomous expenditure by 50 units. The tax cut raises disposable income by 50 units, which stimulates planned aggregate expenditure by increasing consumption spending.
19、 However, the tax cut raises autonomous expenditure by only 50 units times the marginal propensity to consume (MPC), as not all additional income is spent. As long as the MPC is less than one, the tax cut will increase autonomous expenditure by less than 50 units. Thus the increase in government pur
20、chases will have the greater impact on planned aggregate expenditure.10. First, government spending and taxing decisions may affect potential output as well as planned aggregate expenditure. What the government spends its money on, as well as the incentive effects of changes in tax and transfer prog
21、rams, need to be factored in when evaluating the effects of fiscal policy. Long-run growth of potential output is affected by the type of spending the government pursues, as well as how tax policies affect labor supply decisions and investment decisions. Second, changes in government spending and ta
22、xing can affect the governments budget deficit, which in turn may affect long-run investment in capital goods and the growth of potential output. For example, an expansionary fiscal policy may boost planned aggregate expenditure in the short run, leading to increased output and employment, but it ma
23、y also raise real interest rates if it reduces national saving (by increasing the governments budget deficit without an offsetting increase in private saving). The increased interest rates may reduce capital investment and long-run growth of output this is sometimes called the crowding out effect. T
24、hird, fiscal policy is relatively inflexible, with long legislative processes reducing the governments ability to quickly respond to output gaps. The delays in implementation may stem from the legislative process itself (budget recommendations are first presented to Congress by the President, then a
25、re often debated for months before finally becoming law, and may take effect months after this) or from political wrangling over spending and taxing priorities.(LO5)Answers to Problems1. Acmes planned investment in every case is $1,500,000 (its planned expenditure on new equipment plus zero planned
26、increase in inventories). The key to this problem is to find the amount of unplanned inventory investment Acme makes then add this to its planned investment to find Acmes actual investment.a. If Acme sells $3,850,000 worth of goods, it has unplanned inventory investment of $150,000 and total actual
27、investment of $1,650,000.b. If Acme sells $4,000,000 worth of goods as it planned, its actual investment of $1,500,000 equals its planned investment.c. If Acme sells $4,200,000 worth of goods it must draw down $200,000 worth of goods from its existing inventory, implying that inventory investment is
28、 negative $200,000. Acmes actual investment in this case is $1,500,000 - $200,000 = $1,300,000. Output equals short-run equilibrium output in case b, where planned spending and actual spending are equal, as no producer has an incentive to produce either more or less.2. Working with the consumption f
29、unction:a. Disposable income (before-tax income less taxes paid) and consumption are as follows:Before-tax income ($)Taxes paid ($)Disposable income ($)Consumption ($)25,0003,00022,00020,00027,0003,50023,50021,35028,0003,70024,30022,07030,0004,00026,00023,600Graph:The marginal propensity to consume
30、is the increase in consumption caused by a one dollar increase in disposable income. In this case, when disposable income increases by from 22,000 to 23,500, a rise of 1500, consumption rises by 1350. The MPC is therefore 1350/1500 = 0.9. We can confirm this by checking the other points on the consumption function. For example, when disposable income rises by another 800 (24,300 23,500), consumption rises by 720 (
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