Gordon_Answers11e_ch03 - 22 Gordon Macroeconomics, Eleventh...

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22 Gordon • Macroeconomics, Eleventh Edition ± Answers to Questions in Textbook 1. Movements in endogenous variables are explained by the theory; movements in exogenous variables are not. Here and throughout the book, Gordon makes no distinction between exogenous variables and parameters. Both are determined outside the model and fixed for each period of analysis. Both, however, may be variables for purposes of problems and exercises. Thus, although the marginal propensity to consume is treated as a fixed parameter throughout the chapter, the end-of-chapter problems contain examples where MPC takes a different value. Endogenous Exogenous Consumption Autonomous taxes Net exports Marginal propensity to consume GDP Exports Tax revenue Price level Disposable income Interest rate Saving Investment Foreign trade surplus (deficit) Government budget surplus (deficit) 2. We distinguish between the two types of consumption for two reasons. First, each type of spending is determined by a different cause: induced consumption is determined by the level of disposable income and the marginal propensity to consume, while autonomous consumption is determined by factors other than income. Second, changes in autonomous consumption cause a multiplier effect in the economy, but changes in induced consumption do not. 3. The decline in the real personal saving rate from the late 1980s through the 1990s was due to the stock market boom that started in 1982 and ended in 2000. Stock prices rose tenfold over that period, resulting in a sharp increase in household wealth. That increase allowed consumers to increase consumption expenditures relative to disposable income. Between 2001 and 2003, monetary policymakers sharply reduced interest rates, resulting in lower mortgage payments for many households. Those enabled consumers to maintain or increase their consumption expenditures relative to disposable income following 2000’s stock market collapse. 4. Businesses reduce production during a recession primarily because of falling demand for their goods and services. One of the first indications businesses get that demand has fallen is that they have more unsold goods in inventories than they would like. That is, businesses see an unintended rise in inventories, which causes them to reduce output. On the other hand, once businesses become confident that the economy is on the rebound, then they will start to build up inventories in anticipation of higher sales. 5. Positive unintended inventory investment results if income is greater than planned expenditure and businesses’ inventories build up. To avoid the costs of financing and storing unwanted inventories, businesses cut production, which causes income to fall. Negative unintended inventory investment occurs if income is less than planned expenditure and businesses’ inventories shrink. To meet current sales and replenish inventories, businesses raise production, causing income to rise. 6.
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This note was uploaded on 09/04/2010 for the course ECON 311 taught by Professor Gordon during the Spring '08 term at Northwestern.

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Gordon_Answers11e_ch03 - 22 Gordon Macroeconomics, Eleventh...

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