Topics to Study for Exam 2 on Chapters 9, 10 & 11

Chapter 9: Components of aggregate expenditure

What is the principal variable that determines household consumption?
What is the consumption function? Why does a change in income lead to a movement along the consumption function?
What is the marginal propensity to consume (how does it relate to the slope of the consumption function)? How does it relate to the marginal propensity to save?
How do the following variables shift the consumption function: wealth, the price level, interest rates, expectations of higher income, expectations of higher interest rates, expectations of a higher price level?
What are the components of investment spending?
What is the motive for business investment spending?
What determines the expected return from investment? What is the opportunity cost of investment? Why is investment demand assumed to be autonomous with respect to current income?
Why (and in what direction) do changes in business expectations, the price level of capital goods, and the interest rate cause the autonomous investment demand function to shift with respect to income?
Why is government spending assumed to be autonomous?
How do net taxes that are assumed to be autonomous affect the consumption function?
How are net exports influenced by domestic current income, interest rates, the domestic price level, and the exchange rate of the dollar?
If net exports are assumed to be autonomous with respect to income, how does a change in the price level affect net exports?

Chapter 10: The aggregate expenditure function and aggregate demand function

What are the components of aggregate expenditure?
Why does equilibrium income occur when injections equal leakages in the circular flow of income model?
What determines the intercept and slope of the aggregate expenditures function?
Why does equilibrium occur when the AE function intersects with a 45 degree line, i.e. when planned spending equals actual output.
What happens to inventories when planned spending is different from actual output?
When autonomous spending increases why does income increase by a multiplier?
Based upon the given MPC, how do you determine the value of the simple multiplier?
How is the value of the multiplier calculated when you know the MPC and the marginal propensity to import, MPM?
How does a change in the price level affect the AE function? How is this used to derive the aggregate demand curve?
Why do only autonomous changes in variables other the price level and income cause a shift in the AD curve?
Going back to chapter 9, what are some of the variable other that the price level that shift AD as a result of changes in autonomous consumption, investment, government, or net exports?

Chapter 11: The aggregate supply function in the long run and short run

How is the demand for labor determined by it productivity that is derived demand curve from the aggregate production function?
Why does the demand for labor decrease as the real wage increases?
Why does the supply for labor increase as the real wage increases?
Why does the potential output or natural rate of output of the economy occur when the labor market “clears” with a real wage determined by the supply and demand for labor?
Why is the full employment unemployment rate not equal to zero when the labor market clears?
Why does the nominal wage depend upon the expected future price level?
Why is the short-run AS curve upward sloping when the actual price level does not equal the expected price level? Why is this not a market-clearing rate of employment in the labor market?
How does the short-run AS curve shift to move actual output toward the level determined by the long-run AS curve?
How does each of the following explain why wages may be more sticky in the downward direction in times of unemployment than in the upward direction during times of expansion?

(Note that a contractionary gap can still be closed with sticky wages as long as they rise more slowly than prices, so that real wages decrease.)