Resource: Lecture Template
Macroeconomics: ECO202
Lesson Number 4: Introduction to Economics (Chapters 8-10)
Lesson Number 4: Objectives
Chapter 8:
After reading and reviewing this chapter, the student should be able to:
1.
Define aggregate demand and aggregate supply.
2.
Show how business cycles result from changes in aggregate demand and aggregate supply.
3.
List factors that affect consumption, investment, government spending, and net exports.
4.
Explain the wealth effect, the interest rate effect, and the international trade effect as
reasons for a downward-sloping aggregate demand curve.
5.
List nonprice determinants that cause the aggregate demand curve to shift.
6.
Explain differences in the short-run and long-run aggregate supply curves.
7.
List nonprice determinants that cause the aggregate supply curve to shift.
8.
Show how aggregate demand and aggregate supply equilibrium is determined.
Chapter 9:
After reading and reviewing this chapter, the student should be able to:
9.
Define disposable income as the sum of consumption and saving.
10. Graphically construct consumption and saving functions.
11. Define autonomous consumption.
12. Calculate marginal propensity to consume, marginal propensity to save, average propensity
to consume, and average propensity to save.
13. Review the determinants of consumption.
14. Graphically construct investment as a function of income.
15. List the determinants of investment.
16. Graphically construct government spending as a function of income.
17. Graphically construct net exports as a function of income.
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18. Calculate marginal propensity to import.
19. Determine aggregate expenditures as the sum of consumption, investment, government
spending, and net exports.
Chapter 10:
20. Define equilibrium.
21. Explain the impact of changes in aggregate expenditures on real GDP.
22. Define leakages and injections of planned spending.
23. Define and calculate the spending multiplier.
24. Use the spending multiplier to calculate the recessionary gap.
25. Name factors other than MPS and MPI that determine the actual spending multiplier in an
economy.
26. Derive an aggregate demand curve.
27. Explain the Keynesian model.
4.2 Chapter 8 Introduction
The primary purpose of this chapter is to introduce the aggregate demand and supply model. This
is the second major macroeconomic model developed in the book.
The unique features of the chapter include the development of the aggregate demand curve from
its foundation in the aggregate expenditures curve. The chapter also shows the factors that cause
the aggregate demand curve to shift. The aggregate supply curve is also developed, and the
short-run aggregate supply curve is distinguished from the supply curve that exists in the long
run.
4.3: Chapter 9 Introduction
The primary purpose of this chapter is to begin the analysis of real GDP by studying the
components of national spending: consumption (C), investment (I), government spending (G),
and net exports(X).
The chapter develops the consumption and saving functions and demonstrates that one is the
mirror image of the other. The marginal propensity to consume (MPC) is the change in
consumption that results from a change in income. The (MPC) determines the slope of the
consumption function. The chapter also discusses how the domestic economy is linked to the
international economy through the net export function. The slope of the net export function is
due to the marginal propensity to import (MPI). When these functions are combined with
autonomous investment and autonomous government spending, the aggregate expenditures
function is found. An appendix at the end of this chapter shows how this aggregate expenditure
function and its components can be portrayed algebraically. The appendix also illustrates the
important role income plays in determining aggregate expenditures.
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4.4: Chapter 10 Introduction
The primary purpose of this chapter is to explain the income-expenditure model. This model is
the foundation of modern macroeconomics.
The unique feature of this chapter is the income-expenditure model, which shows how aggregate
expenditures determine the level of real GDP and employment. The concept of macroeconomic
equilibrium—a condition in which leakages equal injections and aggregate expenditures equal
real GDP—is also presented. This chapter also discusses the concept of the multiplier. The
appendix to this chapter shows an algebraic income-expenditures model that is solved for
equilibrium real GDP and for the multiplier.
References
Boyes, W., Melvin, M. (2010). Economics (8 ed). South-Western Cengage Learning.
Glossary
demand-pull inflation
cost-push inflation
wealth effect
interest rate effect
international trade effect
aggregate demand curve
aggregate supply curve
long-run aggregate supply curve (LRAS)
consumption function
saving function
dissaving
autonomous consumption
marginal propensity to consume (MPC)
marginal propensity to save (MPS)
average propensity to consume (APC)
average propensity to save (APS)
wealth
marginal propensity to import (MPI)
spending multiplier
recessionary gap
Resource: Assignment Sheet
Macroeconomics: ECO202
Lesson Number 4: Introduction to Economics (Chapters 8-10)
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Reading Assignments
1. Chapter 8
2. Chapter 9
3. Chapter 10
Supplemental Videos
The Paradox of Thrift- 60 Second Economics.
http://youtu.be/qrHyDztQlBY
Discussion Assignments
1. Why do economists pay so much attention to investment, even though it is a relatively
small component of aggregate spending?
2. What measures have been taken to increase demand in the recent recession? Did these
measures actually work? Why or why not?
Graded Assignments
1. Chapter 10 focused on John Maynard Keynes’ economic contribution of the spending
multiplier. According to Keynesian economic theory, when the government injects
money into the economy, a multiplier affect occurs. The following three articles look at
how this theory works in today’s world. This assignment requires that you define the
spending multiplier, compare and contrast the three articles, and state whether or not you
agree with Keynes’ theories or the articles and explain why.
Economists View (2012). The multiplier is at least two. Retrieved from
http://economistsview.typepad.com/economistsview/2012/11/the-multiplier-is-at-leasttwo.html
Industry Week (2013). Does US government spending have a multiplier effect? Retrieved
from http://www.industryweek.com/blog/does-us-government-spending-have-multipliereffect
Mitchell, M. (2013). Study shoots down Keynesian ‘multiplier’ claims. Retrieved from
http://news.heartland.org/newspaper-article/2013/02/15/study-shoots-down-keynesianmultiplier-claims
Your paper must be a minimum of two full pages, include three sources, and use APA
formatting. Quotations should be used sparingly and should have quotation marks.
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Quiz
1. Please take the quiz associated with this lesson by clicking on the exam icon in the
lesson.
Resource: Quiz Template
Macroeconomics: ECO202
Lesson Number 4: Introduction to Economics (Chapters 8-10)
Multiple Choice
1.
a.
b.
c.
d.
Other things equal, an increase in aggregate demand will result in
an economic expansion.
higher unemployment and a lower equilibrium price level.
an economic recession.
a decrease in equilibrium real GDP and an increase in the equilibrium level of
prices.
e. decreased economic welfare.
ANS: A
2.
a.
b.
c.
d.
e.
An increase in aggregate demand will lead to
demand push inflation.
demand pull inflation.
price push inflation.
price pull inflation.
cost push inflation.
ANS: B
3.
a.
b.
c.
d.
e.
Cost-push inflation is
associated with an economic expansion.
associated with an economic contraction.
caused by a decrease in aggregate supply.
identical to demand-pull inflation.
the result of increased consumer spending.
ANS: C
4.
Other things equal, the steeper the aggregate supply curve,
a. the greater the expansionary effect of an increase in aggregate demand.
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b.
c.
d.
e.
the smaller the inflationary effect of an increase in aggregate demand.
the smaller the recessionary effect of a decrease in aggregate demand.
the greater the expansionary effect of a decrease in aggregate demand.
the smaller the recessionary effect of an increase in aggregate demand.
ANS: C
5.
Other things equal, a depreciation of the U.S. dollar against other foreign currencies will
result in
a. a decrease in domestic investment spending.
b. an increase in U.S. demand for foreign goods.
c. an increase in foreign aggregate expenditures.
d. a decrease in U.S. aggregate expenditures.
e. an increase in foreign demand for U.S. goods.
ANS: E
6.
a.
b.
c.
d.
e.
Which of the following statements is true?
Consumption is always exactly equal to disposable income.
Disposable income minus consumption equals savings.
Disposable income plus savings equals consumption.
Savings equals consumption minus disposable income.
Disposable income equals available income for saving.
ANS: B
Figure 9-1
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7.
a.
b.
c.
d.
e.
In Figure 9-1, consumption equals disposable income
at point A only.
at point B only.
at point C only.
at point D only.
anywhere along the consumption function.
ANS: B
8.
a.
b.
c.
d.
e.
In Figure 9-1, at any point to the left of point B,
autonomous consumption is less than zero.
saving occurs.
disposable income is greater than consumption.
consumption is greater than disposable income.
autonomous consumption is zero.
ANS: D
Figure 9-2
Disposable Income (Yd)
$0 million
$50 million
$100 million
$150 million
$200 million
Consumption (C)
$10 million
$55 million
$100 million
$145 million
$190 million
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$250 million
$300 million
$350 million
9.
a.
b.
c.
d.
e.
$235 million
$280 million
$325 million
Refer to Figure 9-2. The MPC is equal to
0.05.
0.10.
0.45.
0.90.
0.95.
ANS: D
10.
Refer to Figure 9-2. The MPS is equal to
a. 0.01.
b. 0.10.
c. 0.90.
d. 0.09.
e. 1.00.
ANS: B
11.
John Maynard Keynes believed that
a. the sum of all incomes will never provide enough purchasing power to allow
households to pay for all products.
b. macroeconomic equilibrium is not possible.
c. all markets will automatically clear if government does not interfere with the
economy.
d. capitalism is responsible for the downturn of the U.S. economy.
e. the economy can reach an equilibrium level of real GDP that is below full
employment of resources
ANS: E
12.
Which of the following statements is not true concerning equilibrium?
a. An increase in inventories tends to occur when the economy is in equilibrium.
b. Equilibrium is a level of income at which aggregate expenditures equal income.
c. Equilibrium occurs at the level of income at which leakages equal injections.
d. Equilibrium is a point from which there is no tendency to move.
e. A change in autonomous expenditures is multiplied into a larger change in the
equilibrium level of income.
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ANS: A
13.
The paradox of thrift refers to a negative impact on the economy if the
a. increase in consumption that is greater than a corresponding increase in saving.
b. increase in saving is greater than a corresponding increase in investment.
c. increase in saving is less than a corresponding increase in investment.
d. increase in consumption is greater than a corresponding increase in saving.
e. increase in government spending is greater than a corresponding increase in
saving.
ANS: B
14.
The multiplier effect means that a given change in autonomous expenditures
a. will change equilibrium income by an amount greater than the initial change in
autonomous expenditures.
b. will change equilibrium by an amount less than the initial change in autonomous
expenditures.
c. will change equilibrium income by an amount equal to the initial change in
autonomous expenditures.
d. will change the MPC by a multiple of the initial change in autonomous
expenditures.
e. will change the MPS by a multiple of the initial change in autonomous
expenditures.
ANS: A
15.
The smaller the MPS,
a. the smaller the spending multiplier.
b. the larger the spending multiplier.
c. the larger the MPI.
d. the larger the leakage out of the income stream when autonomous expenditures
increase.
e. the smaller the MPC.
ANS: B
True or False
1.
A rightward shift of the aggregate demand curve with no change in aggregate supply
signals an economic expansion.
ANS: T
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2.
Demand-pull inflation occurs when there is a decrease in aggregate demand.
ANS: F
3.
The purpose of developing and understanding an aggregate supply-aggregate demand
model is to help us understand economic growth and business cycles.
ANS: T
4.
Inflation normally causes an increase in aggregate demand.
ANS: F
5.
If people expect the economy to do well in the future, they will increase their
consumption today at every price level.
ANS: T
6.
The difference between savings and saving is that saving is considered to be a flow,
whereas savings are a stock, in the same way that income is a flow, whereas wealth is a stock.
ANS: T
7.
The higher the disposable income, the more households are willing and able to spend.
ANS: T
8.
Dissaving occurs when consumption spending exceeds disposable income.
ANS: T
9.
As capital goods become more expensive, the rate of return from investment in them
rises, and so does the amount of investment.
ANS: F
10.
Assume that Congress imposed strict environmental regulations on steel manufacturers.
Other things equal, such policy is likely to cause a reduction in planned investment by such
firms.
ANS: T
11.
Adjustment to a macroeconomic equilibrium is based on the idea that individuals change
their behavior when expectations and reality do not match.
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ANS: T
12.
When total planned expenditures are less than real GDP, inventory depletion will occur.
ANS: F
13.
In order for an economy to attain equilibrium, the leakages must be offset by
corresponding injections of spending into the domestic economy through investment,
government spending, and exports.
ANS: T
14.
If the MPS equals 0.25 and the MPI is 0.15, then an initial change in investment spending
of $250 million will result in a total change in equilibrium real GDP of $625 million.
ANS: T
15.
The recessionary gap is defined as the required change in spending needed to move the
economy to an equilibrium equal to potential real GDP.
ANS: T
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