With fixed prices and wages, what happens to production when demand changes?
Production changes.
With fixed prices and wages, what changes when production changes?
Income changes.
What does economic investment add to?
Global potential output.
How are net exports, or the trade balance, calculated?
Exports minus imports.
When does a trade surplus occur?
When exports exceed imports.
What identity defines total goods demand in an open economy?
How is disposable income defined using income and taxes net of transfers?
, where is taxes minus government transfers.
What does the consumption function describe, and what kind of equation is it?
It describes consumption as a function of disposable income and is a behavioural equation.
What is the linear consumption function, and what does its slope represent?
, where is the propensity to consume.
How do endogenous and exogenous variables differ in a model?
Endogenous variables are determined within the model; exogenous variables are taken as given.
What condition defines goods-market equilibrium between output and demand?
.
What is equilibrium output in a closed economy with linear consumption?
.
What spending expression defines autonomous spending?
.
How does the multiplier change as propensity to consume approaches one?
It becomes larger.
How much does each further demand increase equal during successive spending rounds?
times the preceding income increase.
How is private saving defined in terms of disposable income and consumption?
How is public saving defined?
What does positive public saving indicate?
A budget surplus.
What does negative public saving indicate?
A budget deficit.
How can goods-market equilibrium be written as investment equaling saving?
What are the two equivalent statements of goods-market equilibrium?
Production equals demand, or investment equals saving including public saving.
What is the paradox of thrift?
Attempts by individuals to save more can reduce aggregate demand and output, potentially lowering total saving.
What can the model’s government adjust to affect desired output?
Government spending or taxes.
What two components make up fixed investment?
Non-residential investment and residential investment.
How is inventory investment calculated for a given year?
Goods produced minus goods sold.
Which government purchases count as government spending?
Purchases of goods and services by federal, state, and local governments.
What are exports, imports, and goods demand in a closed economy?
and .
What does changing do to consumption at each disposable income level?
It shifts consumption at every given level of disposable income.
How does the propensity to consume differ between richer and poorer households?
It is lower for relatively richer households.
With , how much does a €1 billion autonomous-spending increase raise output?
€2.5 billion.
What is the cumulative increase after spending rounds?
.
With propensity to consume 0.8, what output increase follows a demand increase of 100?
500.
Which work and year contain Keynes’s investment-equals-saving approach?
*The General Theory of Employment, Interest and Money* (1936).
What is the propensity to save when the propensity to consume is ?
, between 0 and 1 when is between 0 and 1.
In the model, what happens to output when consumers choose to save more?
Output falls when and/or decreases.
What determines equilibrium saving when investment, taxes, and government spending are fixed?
Saving cannot change because .
What is the fallacy of composition?
The assumption that what is true of the parts must always be true of the whole.
Which work did Keynes identify as featuring the paradox of thrift?
*The Fable of the Bees: or, Private Vices, Publick Benefits* (1714).
Who wrote *The Fable of the Bees: or, Private Vices, Publick Benefits* (1714), cited by Keynes?
Bernard Mandeville.
What makes changing government spending or taxes difficult?
Such changes are not easy to make.
What can make fiscal-policy effects difficult to assess?
Changes in investment and imports.
What may affect the outcomes of fiscal policy?
Expectations.
Why may fiscal-policy effects on output not last in the medium run?
They may be unsustainable.
What can tax cuts or increased government spending cause in the long run?
Large budget deficits and public debt.
What is the only Nash equilibrium in the described prisoners’ dilemma?
Mutual defection.
Answer 20 questions on The Short Run.
1. In a closed economy with linear consumption, which formula gives equilibrium output?
2. A household has disposable income of and consumes . How is its private saving defined?
Go over the full study guide for The Short Run.
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