11 good questions on "The Multiplier Process and Inventory Adjustment"

What are the reasons for a shift or change in planned aggregate expenditure?
  • A change in the planned investment
    • can occur because of a change in interest rate
  • A shift in the aggregate consumption function CF (changes in the vertical intercept AC)
    • can occur when there is a change in the level of planned aggregate wealth due to rise in housing prices
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How does the economy move from the initial point of income expenditure equilibrium to a new point of income expenditure equilibrium:
When there is a shift in the planned aggregate expenditure that comes from the two reason for the shift, there will be an autonomous change in planned aggregate expenditure.
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How does a the autonomous change planned aggregate expenditure occur? Spending by who list 3?
  • autonomous change in the planned aggregate expenditure is a change in the desired level of spending by
    • firms
    • household
    • government
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Why does the shift in autonomous AE occur? And how does it change how firms respond? What is the effect on GDP?and what does a small shift in autonomous AE mean for the GDP?
Because of a change in autonomous planned AE shifting the curve to the left
since the  there is a decrease in inventories firms will produce more
GDP will increase by grater than the change in autonomous aggregate expenditure
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What does the gap between the planned aggregate expenditure and real GDP represent
the gap between the planned aggregate expenditure and real GDP represent the vertical distance at is the unplanned inventory investment.
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How do firms respond to a decrease in unplanned inventory investment? Which leads to what in real GDP? Which leads to what in disposable income?
Firms respond to an unplanned inventory investment by increasing production.
which leads to a rise in real GDP
which leads to an increase in disposable income .
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What occurs in the second round after the increase in YD lead to a rise in consumer spending at the end of the first round? What do we call what happened, and what is its formula for the multiplier?
  • The increase in YD lead to a rise in consumer spending, sets off a second round of increase in real GDP
  • which lead the disposable income and consumer spending to increase further.
  • we call what happened the ffects of the multiplier
  • the mulitplier is calculate by taking the change in income, divided by change in aggregate expenditure.
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What 2 thing does it mean when the multiplier is greater than 1
  • It mean that
    • the change in income-expenditure equilibrium GDP (income from expenditure) is larger thatn the autonomous change in planned aggregate expenditure.
    • each increase in disposable income and each corresponding increase in spending is smaller than the pervious round, because MPC is less than 1
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What happens to the increase real GDP at each round the to the next? Why is the increase in YD and real GDP diminishing?
  • The increase in real GDP diminishes from each round to the next, to the point where the increase of real GDP is negligible
  • The increase in YD and real GDP diminishing because at each round some of the increase in disposable income leaks out into savings.
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What does the paradox of thrift describe when looking at the income expenditure equilibrium GDP?
  • the paradox of thrift describes what happens when in households and firms cut their spending anticipating tough times
  • this causes a fall in income expenditure quilibrium GDP (THAT IS SEVERAL TIMES LAREGER THANTHE FALL IN OVERALL SPENDING) .
  • which leads real GDP to fall leaving consumers and producer worse off.
  • which leads to a depressed economy, leaving household and firms worse off than if they had acted by spending during this time.
  • so lavish spending makes consumer and producers better off
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An autonomous change in planned aggregate expenditure leads to? What does autonomous change in planned aggregate expenditure play an important role in?
A change in income-expenditure equilibrium GDP both directly and through an induced change in consumer spending
autonomous change in planned aggregate expenditure plays an important role in expansions
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