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AE Model: Private Open Economy quiz

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  • What is a private open economy in the context of the aggregate expenditures model?
    A private open economy is an economy without government but with trade, meaning it includes consumption, investment, and net exports, but no government purchases.
  • Which components make up aggregate expenditures in a private open economy?
    Aggregate expenditures in a private open economy consist of consumption, investment, and net exports.
  • What is missing from the aggregate expenditures equation in a private open economy compared to a public economy?
    Government purchases are missing from the aggregate expenditures equation in a private open economy.
  • How is macroeconomic equilibrium found in the aggregate expenditures model?
    Macroeconomic equilibrium is found where the aggregate expenditures line crosses the 45-degree line, indicating that aggregate expenditures equal GDP.
  • What is the consumption function used in the example from the video?
    The consumption function is C = 2 + 0.5y, where 2 is the autonomous consumption and 0.5 is the marginal propensity to consume.
  • How does the consumption function change when investment is added in the private open economy?
    When investment is added, the function becomes C + I = 3 + 0.5y, increasing the intercept by the amount of investment.
  • What is the full aggregate expenditures equation for a private open economy as given in the video?
    The full equation is AE = 3.5 + 0.5y, which includes consumption, investment, and net exports.
  • Why does the slope of the aggregate expenditures line remain the same when investment and net exports are added?
    The slope remains the same because investment and net exports are constants, so only the intercept changes, not the rate at which expenditures increase with GDP.
  • What does the 45-degree line represent in the aggregate expenditures model?
    The 45-degree line represents all points where aggregate expenditures equal GDP.
  • What happens to GDP if investment or net exports change in a private open economy?
    A change in investment or net exports will have a multiplier effect on GDP, amplifying the initial change.
  • In the example, what is the equilibrium level of GDP and aggregate expenditures?
    The equilibrium occurs where both GDP and aggregate expenditures are equal to 7 (e.g., \$7 billion).
  • What does the intercept of the aggregate expenditures line represent in the model?
    The intercept represents the sum of autonomous consumption, investment, and net exports when GDP is zero.
  • How does the marginal propensity to consume (MPC) affect the aggregate expenditures line?
    The MPC determines the slope of the aggregate expenditures line, showing how much expenditures increase as GDP increases.
  • Why is it important to understand the full aggregate expenditures equation in different types of economies?
    Understanding the full equation helps identify which components are present or absent, clarifying how spending and production interact in each economy type.
  • What distinguishes a private open economy from a private closed economy in the AE model?
    A private open economy includes net exports (trade), while a private closed economy does not include trade.