ECON Chapter 11

Recessionary Expenditure gap

Insufficient aggregate spending, Spending below full-employment GDP, Increase G &/or decrease T

Causes of unplanned inventories within the economy

Unplanned changes in inventory = difference between real GDP (Y) and aggregate demand, when AD > Y, firms see that their inventories have dropped below desired level, so production increases to bring inventories up to desired levels

The difference between the investment demand curve & the investment schedule is that the former shows

an inverse relationship between investment & interest rate, while the latter shows no correlation between investment & income

John Maynard Keynes developed the aggregate expenditures model in order to understand the

Great Depression

Inflationary Expenditure gap

Too much aggregate spending, Spending exceeds full-employment GDP, Decrease G &/or increase T

An upward shift of the aggregate expenditures schedule might be caused by

a decrease in imports, w/ no change in exports

Taxes represent

a leakage of purchasing power, like saving

An inflationary expenditure gap is the amount by which

aggregate expenditure exceeds the full-employment level of GDP

Other things equal, the slope of the aggregate expenditures schedule will increase as a result of

an increase in the MPC

In a private closed economy, when aggregate expenditures exceed GDP,

business inventories will fall

In the aggregate expenditures model, we note that an increase in gov't purchases, G, & an increase in lump-sum taxes, T, of the same amount will have

different effects on GDP, w/ the change in G having a larger impact than the change in T

In the aggregate expenditures model, it is assumed that investment

doesn't change when real GDP changes

When investment remains the same at each level of GDP in a private closed economy, the slope of the aggregate expenditures schedule

equals the MPC

A private closed economy includes

households & businesses, but not gov't or international trade

If MPC = 0.5, a simultaneous increase in both taxes & gov't spending of $20 will

increase GDP by $20

Investment & saving are, respectively

injections & leakages

The aggregate expenditures model is build upon which of the following assumptions?

prices are fixed

An increase in taxes will have a greater effect on the equilibrium GDP

the large the MPC

In the aggregate expenditures model, technological progress will shift the investment schedule

upward & increase aggregate expenditures

If an unintended increase in business inventories occur,

we can expect businesses to lower the level of production