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What is Autonomous Spending?
- The portion of total spending that is independent of the level of income.
- Spending on basic necessities.
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What is Induced Spending?
- The portion of spending that depends on the level of income.
- Frivolous spending
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What is Marginal Propensity to Consume(MPC)?
The ratio of the change in consumption to the corresponding change in income.
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What is Marginal Propensity to Save(MPS)?
The ratio of the change in savings to the corresponding change in income.
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What is Investment Spending?
- Investment Spending is Autonomous - not dependent on level of income
- Far more volatile than consumer spending
- Investment can be postponed
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What is Expenditure Equilibrium?
- The income at which the value of production and aggregate expenditures are equal.
- @ Equilibrium AE = Y
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What is Marginal Propensity to Expend(MPE)?
The ratio of the change in aggregate expenditure that results from a change in income.
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What is Marginal Leakage Rate(MLR)?
The rate of change of leakages that result from a change in income?
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What is the Multiplier?
- The effect on income of a change in autonomous spending.
- The value of the multiplier depends on the MPE
- In general, a one dollar increases in autonomous spending will lead to more than a one dollar increase in income
- Higher MPE = Higher Multiplier
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What are Determinants of Consumption?
- Wealth Effect - changes in wealth change consumption spending
- Change in Price Levels (real balances effect) - Financial asset values do not always increase with price rises, and may need to be replenished
- Changes in the age of consumer durables
- Change in consumer expectations
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What are the Determinants of Investment?
- Interest rates
- Purchase price, installation, maintenance and operating costs of capital goods
- The age of capital goods and amount of spare capacity
- Business expecations
- Government regulations
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Is Government Spending autonomous?
YES
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What is the Marginal Tax Rate?
The ratio of the change in taxation as a result of a change in income.
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What is the Marginal Propensity to Import(MPI)?
The ratio of the change in imports that results from a change in income.
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At AE Equilibrium, are leakages = injections?
- Yes
- I + G + X = S + T + IM
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What are the induced components of the T, C, X(net) and AE equations?
- T = MTR(Y)
- C = MPC(Y)
- X(net) = MPM(Y)
- AE = MPE(Y)
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Which of the following supports the Keynesian argument that interest rates have no effect on consumption?
a. Consumers find it difficult to adjust their spending habits.
b. Higher interest rates will decrease the demand for consumer loans but increase consumer saving.
c. Interest rates are inflexible because of monopoly power in the economy.
d. Autonomous consumption is usually zero in most modern economies.
e. All of the above.
A: Consumers find it difficult to adjust their spending habits.
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What is meant by dis-savings?
a. The level of savings when income is zero.
b. Negative savings.
c. The level of savings where it is equal to consumption.
d. The level of savings where it is equal to income.
B: Negative savings.
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Which of the following is generally more volatile than consumption?
a. Saving.
b. Investment.
c. Imports.
d. Tax rates.
e. None of the above.
B: Investment
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What happens if aggregate expenditures exceeds the level of production?
a. National income exceeds the level of production and inventories will accumulate.
b. The level of production exceeds national income and inventories will accumulate
c. National income exceeds the level of production and inventories will be reduced.
d. The level of production exceeds national income and inventories will be reduced
e. National income is less than total spending and inventories will be reduced.
E: National income is less that total spending and inventories will be reduced.
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Which of the following statements reflects the major problem facing Canada and other countries in the 1930s?
a. They were faced with big recessionary gaps.
b. The level of government spending was far too high to sustain full employment.
c. Full-employment GDP was well below equilibrium GDP.
d. They were faced with big inflationary gaps.
A: They were faced with big recessionary gaps.
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All of the following, except one, will cause a decrease in autonomous consumption. Which is the exception?
a. A sharp increase in stock prices.
b. Rising fears of political uncertainty concerning the possible break-up of the country.
c. A dramatic increase in the prices of most consumer goods.
d. An increase in income tax rates.
A: A sharp increase in stock prices.
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All of the following factors except one will cause the aggregate expenditure function to graphically shift upward. Which is the exception?
a. An increase in the age of the stock of consumer durable goods in the possession of consumers.
b. The expectation of a future decline in the consumer price index.
c. A big increase in the stock market index.
d. The expectation of an economic boom in the near future.
B: The expectation of a future decline in the consumer price index.
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Which of the following will cause net exports to increase?
a. An increase in Canadian prices.
b. An increase in foreign prices.
c. A decrease in foreign incomes.
d. An appreciation in the Canadian dollar.
C: A decrease in foreign incomes.
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What does autonomous consumption refer to?
a. The level of consumption spending at break-even income.
b. The level of consumption spending which is independent of the income level.
c. The level of consumption spending which is independent of the rate of interest.
d. The amount of consumption spending when saving is zero.
e. The poverty-line level of consumption.
B: The level of consumption spending which is independent of the income level.
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All of the following, except one, are determinants of investment spending. Which is the exception?
a. The rate of interest.
b. The purchase price and operating costs of capital.
c. The level of wealth-holding in the economy.
d. The age of capital goods.
e. Business expectations.
C: The level of wealth-holding in the economy.
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