Consumer Investment

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Explain why an increase in potential output would shift out the AS curve and lead to a movement along the AD curve. Explain why a tax cut would shift the AD curve outward (increase aggregate demand). Increase in AS—Movement along AD (know graph)

Increase in AD—tax cut increases DI, leads to increase in C—Shift to the right (AD) (know graph) 2.) Describe an example of either a monetary or fiscal policy event that would decrease aggregate demand. Show the impact on output and prices.

Decrease AD by:
- Reduce Govt Exp
- Increase tax on consumer income
- Increase tax on investment returns
- Decrease transfer payments (social security, unemployment) 3.) Describe an example of an exogenous event that would decrease aggregate demand. Show the impact on output and prices.
Decrease AD by:
- War
- Bad weather
- Oil price increase
4.) Define the concept of equilibrium in the multiplier model. Total Expenditure (or planned expenditure) is equal to GDP
5.) Complete the charts below:
Levels of
GDP (and
DI)
Planned
Consumption
Planned
Savings
Planned
Investment Level of GDP
>
=
<
Total Planned
Consumption and
Investment (TE)
Resulting
Tendency of
Output
4200 3800 400 300 4200 > 4100 Contracting
3900 3600 300 300 3900 = 3900 Equilibrium
3600 3400 200 300 3600 < 3700 Expanding
3300 3200 100 300 3300 < 3500 Expanding
3000 3000 0 300 3000 < 3300 Expanding
2700 2800 -100 300 2700 < 3000 Expanding
Levels of
GDP (and
DI)
Planned
Consumption
Planned
Savings
Planned
Investment Level of GDP
>
=
<
Total Planned
Consumption and
Investment (TE)
Resulting
Tendency of
Output
4200 3800 400 400 4200 = 4200 Equilibrium
3900 3600 300 400 3900 < 4000 Expanding
3600 3400 200 400 3600 < 3800 Expanding
3300 3200 100 400 3300 < 3600 Expanding
3000 3000 0 400 3000 < 3400 Expanding
2700 2800 -100 400 2700 < 3200 Expanding
6.) Consider the different levels of planned investment in the charts above. What is the resulting difference in GDP? Is...
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