Marginal propensity to consume is the ratio of consumption change to income change.

The correct versions of the statements should be as follows:

Expenditure multiplier, as an absolute value, is bigger than the tax multiplier.

While increases in public expenditures magnify income, decreases in public expenditures reduce income.

The effect of taxes on expenditures shows itself indirectly.

Fiscal policy is a discipline that has gained importance and grown fast since 1930s.

Inflationary Gap is the excess of expenditures when the economy is in equilibrium above the full employment level of income.

Wealth is the value of all assets that households have. These include houses, automobiles, bank accounts, stocks and all kinds of assets such as income expected to be obtained in the future. When the wealth of households increases, the available resources that can be allocated for spending increase, too. As a result, the amount of consumption expenditure at each income level will increase.

One of the government’s tools to affect the economy is to collect taxes and to make expenditures, i.e. fiscal policy. A government collects taxes from households and businesses and uses these funds in a changing scale from producing weapons to building parks, from paying pensions to building highways. The scale and composition of these taxes and expenditures have a significant effect on the economy. As mentioned before, according to Keynes’ basic opinion brought to agenda in 1930s, fiscal policy can be used to stabilize the fluctuations in production and employment.

The primary automatic stabilizer is the income tax. Another important automatic stabilizer is the unemployment insurance premiums and unemployment benefits. Dividend payments of corporations, savings of households, changes in firm stocks, government budget deficit or surplus can also serve as automatic stabilizers.

An important feature of the net export function is that it is the only component that can have a negative value in aggregate expenditures. We have already mentioned that the negative net export value can emerge in cases where the import volume of the home country exceeds her export volume.

Economic agents obtain the goods and services they demand by paying the cost, that is, by spending. If we rewrite our aggregate expenditure function for an open economy, we get: AE = C + I + G + NX According to equation above, aggregate expenditures (AE) are the sum of consumption expenditures (C), investment expenditures (I), government expenditures (G) and net exports (NX). The aggregate expenditure function shows us the level of spending at each income level.

The consumption function is the most important component of the modern macroeconomic theory.

Demographic Factors: When the other factors effecting consumption are assumed to be constant, an increase in population will increase consumption expenditures. Here, both the increase in the number of people in the country and the changes in the age composition of the population have an effect on the consumption expenditures.

One of the most important studies of economic history is General Theory of Employment, Interest and Money written by John Maynard Keynes in 1936.

The classical model explains the continuous realization of employment in the economy, based on Say’s Law, which states that every supply creates its own Demand.

Contrary to microeconomics, in macroeconomics we think big. We consider, in macroeconomics, not only the supply of and demand for bread in a particular market, but the supply of and demand for all goods and services produced in the economy; not only the price of bread but the average price of all products in the economy; not only the consumption of a single person or family, but the overall consumption of all the people or families in the economy; not only the investment of a single automobile factory, but investments of all businesses in the economy as a whole. Macroeconomics is not only interested in the determinants of these large scale variables, but also mutual relationships among them and the meaning of changes they display in time. Since choice A is related to microeconomics.

Wealth is the value of all assets that households have. These include houses, automobiles, bank accounts, stocks and all kinds of assets such as income expected to be obtained in the future.

Social Transfers: Transfers made by the state with the social purposes (financial aids for retirement funds and association, student grants etc.).

Consumption expenditures are composed of the sum of autonomous consumption and consumption expenditures related to the income (induced consumption). As we discussed above, an increase in the level of income also increases consumption expenditures related to income. This relationship between the change in income and the change in consumption is called marginal propensity to consume (MPC).

Export is the amount of goods and services produced in the home country and sold to other countries.

Average propensity to save is the ratio of savings to income.