Macro Economics Chapter 08 Power Point

Question 1

Who was John Maynard Keynes?

Answer 1

British economist (1883-1946) who offered an explanation of the Great Depression of the 1930’s

Question 2

When were the ideas of the classical economists widely accepted?

Answer 2

Prior to the 1930’s

Question 3

What did the classical economists believe?

Answer 3

The economy is always tending toward a full employment equilibrium

Question 4

What does Say’s Law say?

Answer 4

Supply creates its own demand.

Question 5

Why is Say’s Law a full employment theory?

Answer 5

Producers produce goods consumers want and consumers have the money to buy because of the wages they were paid

Question 6

Under Say’s Law, is unemployment possible?

Answer 6

Yes, but it is a short-lived adjustment period in which wages and prices decline or people voluntarily choose not to work

Question 7

What is the name of the book Keynes had published in 1936?

Answer 7

The General Theory of Employment, Interest, and Money.

Question 8

Why did Keynes believe that “supply did not create its own demand”?

Answer 8

Demand can be forever inadequate for an economy to achieve full employment.

Question 9

What changed people’s mind about Say’s Law?

Answer 9

The Great Depression and the advent of Keynesian economics

Question 10

What is the essence of Keynesian Economics?

Answer 10

The economy could tend toward a less than full employment equilibrium.

Question 11

What is the main idea of this chapter?

Answer 11

An explanation of Keynesian economics

Question 12

What determines demand for goods and services?

Answer 12

Disposable income

Question 13

What is the consumption function?

Answer 13

A graph that shows the amount households spend for goods and services at different levels of disposable income

Question 14

What is savings?

Answer 14

Money earned but not spent.

Question 15

What is dissaving?

Answer 15

The amount by which personal spending exceeds disposable income.

Question 16

How do people dissave?

Answer 16

By taking money from personal savings

Question 17

What is autonomous consumption?

Answer 17

Consumption that is independent of the level of disposable income.

Question 18

What happens when disposable income is zero?

Answer 18

Spending will equal autonomous consumption because households will dissave for basic needs.

Question 19

What is the marginal propensity to consume (MPC)?

Answer 19

The change in consumption resulting from a change in real disposable income

Question 20

Why does MPC plus MPS always equal 1?

Answer 20

Because savings is defined as money earned but not spent.

Question 21

What does Marginal Propensity to Spend plus Marginal Propensity to Consume equal?

Answer 21

MPS + MPC = 1

Question 22

If MPC changes from .50 to .75 then?

Answer 22

Consumption function shifts from C1 to C2 and People spend more at all levels of real disposable income.

Question 23

What happens when real disposable income changes?

Answer 23

There is a direct relationship between changes in real disposable income and changes in consumption.

Question 24

What happens if factors other than income change?

Answer 24

There is a shift in the consumption schedule.

Question 25

Consumption shifts because of a change in?(Five reasons)

Answer 25

•Expectations•Wealth•Price levels•Interest rates•Stock of durable goods

Question 26

How do expectations affect the consumption function?

Answer 26

Consumers expectations of things to happen in the future will affect their spending decisions today.

Question 27

Does wealth affect consumption?

Answer 27

There is a direct relationship between a change in wealth and a change in consumption.

Question 28

Is there a direct or indirect relationship with the price level affect the consumption function?

Answer 28

There is an indirect relationship between a change in prices and a change in consumption..

Question 29

Is there an direct or indirect relationship with the interest rate affect the consumption function?

Answer 29

There is an indirect relationship between a change in interest rates and a change in consumption.

Question 30

How does the stock of durable goods affect the consumption function?

Answer 30

When durable goods are suppressed, like during WWII, afterwards there is an increase in the demand for goods not previously made available.

Question 31

How does consumption compare with investment?

Answer 31

Consumption is more stable than investment.

Question 32

According to the classical economists, what determined the level of investment?

Answer 32

The interest rate.

Question 33

According to Keynes, what determines the level of investment?

Answer 33

Expectations of future profits is the primary factor, along with the level of interest rates.

Question 34

What is the investment demand curve?

Answer 34

The curve that shows the amount businesses invest at different possible rates of interest.

Question 35

Why is investment demand unstable?(Five reasons)

Answer 35

•Expectations•Technological change•Capacity utilization•Business taxes•Autonomous reasons

Question 36

How do expectations affect investment?

Answer 36

Investors are susceptible to moods of optimism and pessimism.

Question 37

How does technological change affect investment?

Answer 37

New products and new ways of doing things have a big impact on investment decisions.

Question 38

What happens when capacity utilization is low?

Answer 38

Firms can meet an increase in demand without expanding.

Question 39

What happens when capacity utilization is high?

Answer 39

Firms must increase investment to meet an increase in demand.

Question 40

How do business taxes affect investment?

Answer 40

Business decisions depend on the expected after-tax rate of profit.

Question 41

What is autonomous expenditure?

Answer 41

Spending that does not vary with the current level of disposable income.

Question 42

What is the aggregate expenditure function?

Answer 42

What is the aggregate expenditure function?