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AE Model: Components quiz

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Termini in questo insieme (15)

  • What is the primary determinant of consumption in the aggregate expenditure model?
    The primary determinant of consumption is disposable income; as disposable income increases, consumption also increases.
  • How does household wealth affect consumption?
    As household wealth increases, consumption tends to increase because people feel more financially secure and can use their assets to support spending.
  • What impact does expected future income have on current consumption?
    If people expect higher future income, they are likely to increase their current consumption in anticipation of having more money.
  • How does the price level influence consumption?
    A higher price level generally leads to lower consumption because goods and services become more expensive, causing people to cut back on spending.
  • What is the effect of higher interest rates on consumption?
    Higher interest rates encourage saving rather than spending, so consumption decreases as interest rates rise.
  • What does the slope of the consumption function represent?
    The slope of the consumption function represents the marginal propensity to consume, which is the increase in consumption from an additional dollar of disposable income.
  • What is the main factor influencing investment in the AE model?
    Expectations of future profitability are a main factor; if firms expect higher future profits, they are more likely to invest now.
  • How do interest rates affect investment by firms?
    Higher interest rates increase the cost of borrowing, making firms less likely to invest because their expenses rise.
  • What is the effect of higher business taxes on investment?
    Higher business taxes reduce investment because they lower the potential profit firms can earn from their investments.
  • How does cash flow influence a firm's investment decisions?
    Higher cash flow from business operations enables firms to invest more, as they have more internal funds available.
  • What is the main determinant of government purchases in the AE model?
    The transcript does not detail this, but government purchases are typically determined by fiscal policy decisions, which are covered in a later chapter.
  • How does a higher price level in the US compared to other countries affect net exports?
    A higher US price level leads to more imports and fewer exports because US goods become relatively more expensive than foreign goods.
  • What happens to net exports when US GDP growth is higher than in other countries?
    When US GDP growth is higher, imports increase because Americans have more income to spend on foreign goods.
  • How does the exchange rate affect net exports?
    If the US dollar strengthens, imports increase because foreign goods become cheaper, while exports decrease as US goods become more expensive for other countries.
  • What is the relationship between a weaker US dollar and net exports?
    A weaker US dollar makes US goods cheaper for foreign buyers, increasing exports, while imports decrease as foreign goods become more expensive.