ECON 213 UTK EXAM 2 QUESTIONS
AND VERIFIED ANSWERS
John Maynard Keynes - ANSWER-Father of macroeconomics
What book did Keynes publish? - ANSWER-The General Theory
What did Keynes believe was the key to economic growth? - ANSWER-Spending
GDP formula - ANSWER-GDP=AE=C+I+G+(X-M)
Consumption represents how much of GDP? - ANSWER-70%
Income formula - ANSWER-I= C+S
As income _____, savings _______ - ANSWER-Rise, rise
Classical economists believe _______ determine saving, while Keynsians believe ________ determines
saving - ANSWER-Interest rates, income
APC - ANSWER-Percentage of income that is used for consumption (C/Y)
APS - ANSWER-Percentage of income that is saved (S/Y)
APC+APS= - ANSWER-1
MPC - ANSWER-Change in consumption given a change in income
MPS - ANSWER-Change in saving given a change in income
MPC+MPS= - ANSWER-1
Determinants of consumption - ANSWER-Wealth, Expectations about future prices, Household debt,
Taxes
Investment - ANSWER-Spending by businesses that adds to the productive capacity of the economy
GDP is much more ____ than consumption spending - ANSWER-Volatile (changing)
Do investments tank during the recession? - ANSWER-Yes, very hard
Investment levels depend on... - ANSWER-Rate of return on capital
As interest rates fall, investments _____ - ANSWER-Rise
Investment demand depends on... - ANSWER-Expectations about future revenues/returns on
investments, Technological changes, Operating costs, Capital goods on hand
Investment spending is _____ of income - ANSWER-Autonomous (independent)
3 things that make up consumption - ANSWER-Durables, nondurables, services
Where is the economy in equilibrium? - ANSWER-When investments = savings
Multiplier effect - ANSWER-Spending generating more spending
Multiplier formula - ANSWER-1/(1-MPC)
When does the multiplier effect occur? - ANSWER-When an initial amount of spending causes income to
grow by a larger amount
Spending multiplier in the US - ANSWER-Over 90%
MPC= (Always) - ANSWER-0.8
Paradox of thrift - ANSWER-If households save more, the multiplier effect leads to reduced income,
leading to less saving
Spending injections - ANSWER-Include investments, government spending, and exports
Spending withdrawals - ANSWER-Include savings, taxes, and imports
Injections/Withdrawals Model - ANSWER-I+G+X=S+T+M
Balanced budget multiplier - ANSWER-Equal changes in government spending and taxation (a balanced
budget) lead to an equal change in income
Balanced budget multiplier= - ANSWER-1
Multiplier for GVT spending - ANSWER-1/1-MPC or 1/MPS
Tax multiplier - ANSWER-MPC/1-MPC
If exports exceed imports, AE ___ and equilibrium income ___ - ANSWER-Rises, rises
AND VERIFIED ANSWERS
John Maynard Keynes - ANSWER-Father of macroeconomics
What book did Keynes publish? - ANSWER-The General Theory
What did Keynes believe was the key to economic growth? - ANSWER-Spending
GDP formula - ANSWER-GDP=AE=C+I+G+(X-M)
Consumption represents how much of GDP? - ANSWER-70%
Income formula - ANSWER-I= C+S
As income _____, savings _______ - ANSWER-Rise, rise
Classical economists believe _______ determine saving, while Keynsians believe ________ determines
saving - ANSWER-Interest rates, income
APC - ANSWER-Percentage of income that is used for consumption (C/Y)
APS - ANSWER-Percentage of income that is saved (S/Y)
APC+APS= - ANSWER-1
MPC - ANSWER-Change in consumption given a change in income
MPS - ANSWER-Change in saving given a change in income
MPC+MPS= - ANSWER-1
Determinants of consumption - ANSWER-Wealth, Expectations about future prices, Household debt,
Taxes
Investment - ANSWER-Spending by businesses that adds to the productive capacity of the economy
GDP is much more ____ than consumption spending - ANSWER-Volatile (changing)
Do investments tank during the recession? - ANSWER-Yes, very hard
Investment levels depend on... - ANSWER-Rate of return on capital
As interest rates fall, investments _____ - ANSWER-Rise
Investment demand depends on... - ANSWER-Expectations about future revenues/returns on
investments, Technological changes, Operating costs, Capital goods on hand
Investment spending is _____ of income - ANSWER-Autonomous (independent)
3 things that make up consumption - ANSWER-Durables, nondurables, services
Where is the economy in equilibrium? - ANSWER-When investments = savings
Multiplier effect - ANSWER-Spending generating more spending
Multiplier formula - ANSWER-1/(1-MPC)
When does the multiplier effect occur? - ANSWER-When an initial amount of spending causes income to
grow by a larger amount
Spending multiplier in the US - ANSWER-Over 90%
MPC= (Always) - ANSWER-0.8
Paradox of thrift - ANSWER-If households save more, the multiplier effect leads to reduced income,
leading to less saving
Spending injections - ANSWER-Include investments, government spending, and exports
Spending withdrawals - ANSWER-Include savings, taxes, and imports
Injections/Withdrawals Model - ANSWER-I+G+X=S+T+M
Balanced budget multiplier - ANSWER-Equal changes in government spending and taxation (a balanced
budget) lead to an equal change in income
Balanced budget multiplier= - ANSWER-1
Multiplier for GVT spending - ANSWER-1/1-MPC or 1/MPS
Tax multiplier - ANSWER-MPC/1-MPC
If exports exceed imports, AE ___ and equilibrium income ___ - ANSWER-Rises, rises
