Chapter 27: Income and Expenditure – page 1
From Boom to Bust – How is Fort Myers an example of how Investment can multiply in an economy, and how
that same effect can reverse itself? ____________________________________________________________
____________________________________________________________________________________________
The Multiplier: An Informal Introduction – To model how money moves through the economy (a process
known as the multiplier), we will work with a closed economy with ____ government, with __________ prices
and a ___________ interest rate. Keep in mind as you now learn about the multiplier that this is a very simple
economy.
When $100 billion is first spent on home construction, it is counted as part of GDP as
______________________.
This money flows to households as profits and wages, and increases GDP again when households
____________.
After households consume, the money is available as profits and wages to someone else and is included in GDP
when that next group consumes. Different groups in society have different marginal propensities to consume
(MPC). MPC = ______________________________________ / ______________________________________
MPC is expressed as a number between 0 and 1. An MPC of zero would mean a person ____________ all of
their income. An MPC of 1 means a person ___________ all of their income. An MPC of .7 means a person
spends 70% of their income and __________ 30% of it. A person with an MPC of .7 has a marginal propensity
to save of _____.
The total increase in GDP from an initial investment of $100 billion is:
Note that the initial Investment (I) is included in the increase in GDP and additional increases are
consumption.
The number that results from the formula 1/(1 - MPC) is the multiplier. The initial change in GDP times the
multiplier results in the total impact on GDP. The closer the MPC is to 1, the ________________ the
multiplier.
When GDP is affected by a change in consumption, and not I, it is called
_________________________________
On economics tests, certain multipliers are use repeatedly. Complete the following table and remember these:
MPC
.9
.8
.75
.667
.6
.5
.4
.2
Multiplier
Why did the U.S. economy have a higher multiplier, and therefore greater vulnerability to depression in the
1930s?
____________________________________________________________________________________________
CYU 27-1, 1.
__________________________________________________________________________________
3. __________________________________________________________________________________________
p. 727, problem 1. Westlandia’s total change in real GDP = _________________ Eastlandia’s
_________________
2. a. ___________________________ b. _____________________________ c.
____________________________
Consumer Spending – The formula that reveals the relationship between an individual’s disposable income and
consumption is called the ____________________ _____________________. c = ___ + _______ * _______
The letters a, c and yd are all lower case in this formula because
________________________________________.
The letter ‘a’ stands for ________________ ___________________ _________________. This number reveals
that even if a person has no source of disposable income, they still must spend something, either by
_____________ or drawing from _____________________. The consumption function is an
_________________ sloping line that does not start at zero on the y-axis, but rather at ____. The slope of
that line is the individual’s _________. Along that line is the level of ________________ the individual does
at increasing levels of _____________ ___________.
The best estimate of ‘a’ in our society is _______________ and the best estimate of MPC is ________________.
The consumption function for all of society is called the ________________ _________________
_____________.
When there is more spending in society, this curve will shift ____. When there is less, this curve will shift
_______.
CYU 27-2, 1. a. Angelina - _________________ Felicia - __________________ Marina _____________________
Prob. 3.a. Write each person’s consumption function: Andre-__________________ Barbara__________________
Casey - _________________________ Daclan - _________________________ Elena _____________________
4. Start this problem by calculating MPC… change in C / change in YD. Calculate ‘a’ by using zero as base
YD.
b. MPC = ____________ MPS = ______________ c. Agg. Consumption function - _______________________
Shifts of the Aggregate Consumption Function – Why does the aggregate consumption function shift based on a
change in expected future disposable income?
_______________________________________________________
____________________________________________________________________________________________
How do changes in aggregate wealth lead to shifts in the function?
______________________________________
____________________________________________________________________________________________
CYU 27-2, 2. _________________________________________________________________________________
Investment Spending – In recent recessions, which has dipped more drastically, C or I? __________________
Planned investment spending is defined as ________________________________________________________.
Note that planned Investment is not always equal to actual investment. Actual investment is what is
recorded as I.
The Interest Rate and Investment Spending – What area of I is particularly sensitive to r?
____________________
In all sectors of the economy, I is lower when r is ______________. This is even the case when companies are
investing with retained earnings. Why?
____________________________________________________________
Expected Future Real GDP, Production Capacity, and Investment Spending - Other things equal, if future sales
are expected to be high, I will ________________. If current production capacity is high, I will
_______________.
Inventories and Unplanned Investment Spending – What is inventory and what is its purpose?
________________
________________________________________________________ Is inventory a big part of the economy?
____
Inventory investment is _________________________________________________. Inventory investment
can be ____________________ in a given period if sales are particularly _________________. If sales were
constant and predictable, inventory investment would be _________. Since sales fluctuate, there is unplanned
inventory I.
(to be contd.)
Chapter 27: Income and Expenditure – page 2
Inventories and Unplanned Investment Spending – Actual investment spending is represented by the letter
____.
Actual investment = I ______________ + I _____________. Which one of these can be negative? I
___________
If there is positive unplanned inventory investment one year, we expect I to ____________________ the next
year.
If there is negative unplanned inventory investment one year, we expect I to ____________________ the next
year.
Economics in Action: Interest Rates and the U.S. Housing Boom – The recent U.S. housing boom was fed by
low ___________ _________. This helped builders borrow to invest and helped home buyers
__________________.
CYU 27-3, 1. a. ___________________ b. ___________________ c. __________________ d.
_________________
2. __________________________________________________________________________________________
3. __________________________________________________________________________________________
7. a. ____________________________ b. ____________________________ c.
____________________________
8. a. ____________________________ b. ____________________________ c.
____________________________
The Income-Expenditure Model – Inventory levels help economists understand the current state of the
economy and understand the likely _______________ state of the economy. We will now model this with a
positive correlation between spending and output, no G, fixed r, and no net X. You will be happy it is
simplified.
Planned Aggregate Spending and Real GDP - In a simplified, closed economy GDP = ____ + ____ = _______
The aggregate consumption function is:
The formula for planned aggregate spending is:
Since planned inventory is fixed, planned aggregate spending will increase as GDP and YD increase. Table 273 shows us that as YD increases, planned aggregate spending increases by the increase in ______________, or
____, which is change in YD * ________. The difference between AEplanned and GDP is going to be I
_______________.
In row 3 of table 27-3, Iunplanned =-400. This means that of the 900 of consumption, 400 was not produced
previously.
On a graph, CF and AEplanned are ___________________ lines separated by the value of I
___________________.
There is only one point on this graph at which ________ ______ equals AE ________________. This point is
called ___________-______________ __________________. Over time, the economy moves toward
equilibrium.
Please remember that you’re not supposed to love this. If you love this, you’re strange. It’s part of what you have to know to fully understand how the economy works. I encourage you to think hard and try and sort it out. If you do, you will have more earning potential and time for more vacation, which you will hopefully enjoy
more than this!
Income-Expenditure Equilibrium – When real GDP is greater then AEplanned …oops! Companies have produced
products that they are unable to ________. What is likely to happen to Iplanned next year?
___________________
Put it all together: GDP = ___ + ___ = ___ + __________ + ____________ = ___________ + _____________
When GDP is > AEplanned , Iunplanned is ______________, and when GDP is < AEplanned , Iunplanned is
______________.
When GDP is > AEplanned , firms will _______________ ___________________ in the future. When GDP is <
AEplanned , firms will _______________ ______________________. This is one big insight of the chapter. Seize
it.
The only time firms will not adjust future production is when
__________________________________________.
The symbol for income-expenditure equilibrium GDP is _________. You’re a star when real GDP =
AEplanned!!!
In the income-expenditure model (27-9), ________ ______ is on the x-axis (Q as always) and ________
_________ ____________ is on the y-axis (it’s not really a P…deal with it.) This model has two lines on it.
One is a ____º line. On this line, y = 1x + 0. The slope is ____ and the y-intercept is ____, so y = x, or real
GDP = ________________.
The other line represents AE ___________ at different levels of YD, or real GDP. In a y = mx + b format,
this line is y = MPCx + (A + I__________). The slope is ______ and the y-intercept is
____________________________.
To the left of equilibrium, AE ________ > real GDP, so I_________ is negative. GDP is expected to _____
later.
To the right of equilibrium, AE _______ < real GDP, so I________ is positive. GDP is expected to ______
later.
I-E equilibrium is known as the ______________ ___________. The religious undertones are awkward to Mr.
S.
The Multiplier Process and Inventory Adjustment – Changes in inventory are considered a _______________
____________ of future economic activity. Note that leading happens before, and lagging indicators happen
after.
The onset of ch. 27 was a leading indicator of your boredom. The bleary look on your eyes in period 5 is
________.
The two possible sources of a shift of the planned aggregate spending line are
_____________________________
____________________________________________________________________________________________
When there is an autonomous increase in C, the AEplanned line shifts ____. Real GDP increases by
_____________
__________________. Because of the multiplier effect, real GDP has increased more than the increase in
______.
This is captured in the formula:
What is the paradox of thrift? How does it trigger a negative multiplier effect?
_____________________________
____________________________________________________________________________________________
CYU 27-4. 1. _________________________________________________________________________________
2. a.
b.
Prob. 9. b. ______________ c. ______________ d. _________________ e. ______________ f.
_______________
10. a.
b. __________________ c.________________
d. __________________ e.________________
11. a.
________________________________________________________________________________________
12. b.
________________________________________________________________________________________
____________________________________________________________________________________________