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