Test 4 Study Guide - Test 4 Study Guide Chapter 10 Aggregate Expenditure Model-Explain the determination of equilibrium income outcome and

Test 4 Study Guide Chapter 10 – Aggregate Expenditure Model -Explain the determination of equilibrium income, outcome, and employment -The 4 components of spending: Consumption, Investment, Government Spending, Net Exports -Aggregate expenditures = output, leakages = injections -An increase in spending results in an increase in income -Equilibrium changes greater than spending changes (multiplier) -Ways to visualize: graphs, tables, algebra -If aggregate expenditure is less than output, production must be reduced Terms: Investment Schedule – shows the amount of investment forthcoming at each level of GDP Aggregate Expenditures Schedule – shows the amount (C +I) that will be spent at each output \income level Equilibrium GDP – at which the total quantity of produced is equal to quantity of purchased Leakage – A withdrawal of potential spending from income via saving, tax payments, or imports Injection – An addition of spending to income via investment, government purchases, exports Unplanned Changes In Inventories – Changes that firms did not anticipate, change in aggregate spending Net Exports – Exports minus imports Lump-Sum Tax – A constant-amount tax Recessionary Gap – The amount by which aggregate expenditures falls short of the amount of expenditures needed for full employment Inflationary Gap – amount by which the aggregate expenditures schedule must shift downward to decrease

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Chapter 11 – Aggregate Demand and Supply -Aggregate Demand is downward sloping -Aggregate Supply has a positive slope -Household wealth increases, consumption increase, increase in demand -Increase in taxes, reduction of consumption, demand decrease -Determinates of Aggregate Supply 1. Change in input prices a. Domestic resource prices b. Prices of imported resources c. Market power 2. Changes in productivity 3. Change in legal-institutional environment a. Business taxes and subsidies b. Government regulations Terms: Aggregate Demand- A schedule that shows the total quantity demanded at different price levels Aggregate Supply – A schedule showing the total quantity of supplied at different price levels