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Exam 11: Part A: The Aggregate Expenditures Model

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Question 21

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In addition to stuck prices, what are the two simplifying assumptions of the initial model in this chapter? What are two implications from these simplifications?

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One additional assumption is that since ...

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Question 22

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What are two components of aggregate expenditures in a closed private economy?

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Consumption and inve...

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Question 23

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Compare and contrast the recessionary gap and the inflationary gap.

What is the effect of net exports, either positive or negative, on equilibrium GDP?

If prices are stuck, how can firms receive feedback from the market to tell them how much to produce?

Assume the level of investment is $12 billion and independent of the level of total output.Complete the following table and answer the following questions about this private closed economy. (a) What are the sizes of the MPC, MPS, and multiplier in this economy? (b) If full employment in this economy is 110 million, will there be a recessionary or inflationary gap? Explain the consequences of this gap.(c) Using the multiplier concept, determine what change in investment is needed to eliminate the output gap.(d) If full employment in this economy is 80 million, will there be an inflationary or recessionary gap? Explain the consequences of this gap.(e) Using the multiplier concept, determine what change in investment is needed to eliminate the output gap from part (d).

In a graph relating private spending (C + Ig) to real gross domestic product (GDP), what does the 45-degree line represent?

Assume the level of investment is $8 billion and independent of the level of total output.Complete the following table and answer the following questions about this private closed economy. (a) What are the sizes of the MPC, MPS, and multiplier in this economy? (b) If full employment in this economy is 140 million, will there be a recessionary or inflationary gap? Explain the consequences of this gap.(c) Using the multiplier concept, determine what change in investment is needed to eliminate the output gap.(d) If full employment in this economy is 110 million, will there be an inflationary or recessionary gap? Explain the consequences of this gap.(e) Using the multiplier concept, determine what change in investment is needed to eliminate the output gap from part (d).

Explain why are nations are tempted to use policies of imposing tariffs on imported goods, and devaluating their national currency? Further explain why implementing such policies are huge mistakes?

Refer to the following table to answer the questions. (a) Assuming that investment, net exports, government expenditures, and taxes do not change with changes in real GDP, what are the sizes of the MPC, the MPS, and the multiplier? (b) If full employment in this economy is 65 million, will there be an inflationary or recessionary gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary or recessionary gap? Explain.(c) Will there be an inflationary or recessionary gap if the full-employment level of output is $250 billion? Explain the consequences.By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary or recessionary gap? Explain.

Why does the inclusion of a lump-sum tax cause domestic consumption to fall initially by an amount less than the tax?

Explain the difference between an equilibrium level of GDP and a level of GDP that is in disequilibrium.

Define the equilibrium level of output.

Use the table below to answer the following questions.Assume that investment, net exports, government expenditures, and taxes do not change with changes in real GDP. (a) What is the size of the multiplier in this economy? (b) If taxes are zero, government expenditures are $5, investment is $3, and net exports are zero, what is the equilibrium GDP? (c) If taxes are $10, government expenditures are $10, investment is $6, and net exports are zero, what is the equilibrium GDP? (d) Assume investment is $50, taxes are $50, and net exports and government expenditures are each zero.The full-employment level of real GDP is $540.How much of a reduction in taxes is needed to eliminate the recessionary gap? (e) Assume that investment, net exports, and taxes are zero.Government expenditures are $10 and the full-employment level of real GDP is $530.By how much must government spending be reduced to eliminate the inflationary gap?

If there is a recessionary gap of $100 billion and the MPC is 0.8, by how much must taxes be reduced to eliminate the recessionary gap? Assume that prices are stuck and that investment, net exports, government expenditures, and taxes do not change with changes in real GDP.

What is the difference between the investment-demand curve and the investment schedule for the economy?

The data in the first two columns below are for a closed economy without government.Use this table to answer the following questions. (a) What is the equilibrium GDP for the closed economy? (b) What is the size of the multiplier in the closed economy? (c) Including the international trade figures for exports and imports, calculate net exports and determine the equilibrium GDP for an open economy.(d) What will happen to equilibrium GDP if exports were $25 billion larger at each level of GDP? (e) What is the size of the multiplier in the open economy?

Use the graph below to explain the determination of equilibrium GDP by the aggregate expenditures-domestic output approach.At equilibrium C + Ig = Real GDP ($550 + $50 = $600).Why does the intersection of the aggregate expenditures schedule and the 45-degree line determine the equilibrium GDP?

Describe the impact of an increase in government spending assuming no change in taxes and less than full-employment output.

Other things being constant, what will be the effect of each of the following upon the equilibrium level of GDP? (a) An increase in the amount of liquid assets consumers are holding; (b) A sharp rise in stock prices; (c) A rapid upsurge in the rate of technological advance; and (d) A sharp increase in the interest rate.