MACRO: Concepts and Models Flashcards

In the Keynesian model, the primary determinant of aggregate expenditure in the short run is:

Answer: Aggregate income and output

In the Keynesian expenditure model, spending components like consumption are primarily driven by the level of income and output (Y).

The multiplier effect in the Keynesian model occurs because:

Answer: An initial change in spending generates subsequent rounds of income and spending

An initial injection of spending becomes income for others, who then spend a fraction, creating a chain reaction that multiplies the initial impact on GDP.

If the marginal propensity to consume (MPC) is 0.75, the simple spending multiplier is:

Answer: 4

The simple multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4.

In the aggregate expenditure (AE) model, equilibrium GDP is determined where:

Answer: AE = GDP (actual output)

Equilibrium in the AE model occurs where planned aggregate expenditures equal actual output (GDP), so there is no unplanned inventory change.

Which of the following would shift the aggregate demand (AD) curve to the right?

Answer: An increase in government spending

Increased government spending raises total spending in the economy, directly shifting the AD curve rightward.

The long-run aggregate supply (LRAS) curve is vertical because in the long run:

Answer: Output is determined by resource availability and technology, not price level

In the long run, all prices and wages are flexible, so output returns to its potential level regardless of the price level.

According to the classical model, the economy will self-correct to full employment because:

Answer: Flexible wages and prices will automatically eliminate unemployment

Classical economists believe flexible wages and prices adjust to clear labor and goods markets, restoring full employment without government intervention.