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Exam 11: A: The Aggregate Expenditures Model

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Question 1

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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 $10, investment is $6, and net exports are zero, what is the equilibrium GDP? (c) If taxes are $5, 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, net exports and government expenditures are each zero.The full-employment level of real GDP is $340.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 $20 and the full-employment level of real GDP is $330.By how much must government spending be reduced to eliminate the inflationary gap?

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(a) To find the size of the multiplier, ...

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Question 2

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At the current level of real GDP, Sa = $160 Ig = $180 X = $320 M = $280 G = $270 T = $240 (a) What is the size of injections? Leakages? (b) Is GDP at its equilibrium level? Explain.(c) What is the unplanned change in inventories? Explain.

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(a) Injections are $770 ($180 + $320 + $...

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Question 3

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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).

Compare and contrast the recessionary gap and the inflationary gap.

Define the equilibrium level of output.

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).

How does the fact that imports vary directly with GDP affect the stability of the domestic economy?

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

What differentiates the planned equilibrium level of investment from disequilibrium levels of investment? Explain.

Whenever there is a shift in the investment schedule and/or the consumption-saving schedules, there will be a new equilibrium level of GDP.Explain why this is so.

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?

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?

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

What is the relationship between actual investment, planned investment, and saving in an economy? What conditions among these concepts produce equilibrium?

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?

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.

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?

"If taxes and government spending are increased by the same amount, there will still be a positive effect on equilibrium GDP." Explain.

Assume that investment, net exports, government expenditures, and taxes do not change with changes in real GDP and the MPC is .75.(a) Suppose government spending increases by $20 billion.What is the impact on real GDP? (b) Suppose that instead lump-sum taxes increase by $20 billion.What is the impact on real GDP? (c) How would the results in (a) and (b) be different if imports and taxes increase as real GDP increases?