Home Work Econ- Ch.31

Gross Domestic Product | Consumption $ 100 $120 $ 200 $180 $ 300 $240 $ 400 $300 $ 500 $360 Expected Rate of Return | Amount of Investment 25% $ 0 20 $20 15 $40 10 $60 5 $80 Refer to the tables of information for a private closed economy. If the real interest rate is 20 percent, the equilibrium GDP will be

$200.

Refer to the diagram for a private closed economy. The equilibrium GDP is

$180 billion.

An investment schedule shows

the level of investment spending for a given level of GDP.

The data in columns 1 and 2 in the table below are for a private closed economy. a.) Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy. b.) Now open up this economy to international trade by including the export and import figures of columns 3 and 4. Fill in columns 5 and 6 and determine the equilibrium GDP for the open economy. Instructions: Enter your answers as a whole number. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. What is the equilibrium GDP for the open economy? What is the change in equilibrium GDP caused by the addition of net exports? c. Given the original $20 billion level of exports, what would be net exports and the equilibrium GDP if imports were $10 billion greater at each level of GDP? Net exports = $ billion Equilibrium GDP = $ billion d. What is the multiplier in this example?

column (5) | (6) from the table -10 230 -10 270 -10 310 -10 350 -10 390 -10 430 -10 470 -10 510 a.) $400 billion b.) 350 billion -50 billion c.) Net exports = $ -20 billion Equilibrium GDP = $ 300 billion d.) 5

The first graph plots expected rate of return, r, and real interest rate, I in percentage versus investment, in billions of dollars. A falling line labeled A begins at a point on the top of the vertical axis and ends at a point on the bottom right. The second graph plots investment, in billions of dollars versus real domestic product, G D P, billions of dollars. A horizontal line labeled B begins at a point on the vertical axis and ends at the right center. Refer to the diagrams. Other things equal, curve B will shift upward when

curve A shifts to the right.

In the United States from 1929 to 1933, real GDP _____________ and the unemployment rate ________________.

declined by 27 percent; rose to 25 percent.

If inventories unexpectedly rise, then production __________ sales and firms will respond by __________ output.

exceeds; reducing

If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by ________ taxes or ________ government expenditures.

increasing; decreasing

Investment and saving are, respectively,

injections and leakages.

All else equal, a large decline in the real interest rate will shift the

investment schedule upward.

Refer to the diagram for a private closed economy. In this economy, investment

is $40 billion at all levels of GDP.

In the aggregate expenditures model, the equilibrium GDP is

not necessarily equal to the full-employment GDP.

A depression abroad will tend to __________ our exports, which in turn will __________ net exports, which in turn will __________ equilibrium real GDP.

reduce; reduce; reduce

a. Assuming the level of investment is $16 billion and independent of the level of total output, complete the following table and determine the equilibrium levels of output and employment in this private closed economy. Instructions: In the table below, enter your answers as a whole number. If you are entering any negative numbers be sure to include a negative sign (−) in front of those numbers. Equilibrium GDP = _________ Equilibrium level of employment = __________ b. What are the values of the MPC and MPS? Instructions: In part b, enter your answers rounded to 1 decimal place. MPC = ______ MPS = ________

Answers: part a.) Table : last column Saving Billions $ -4 $ 0 $ 4 $ 8 $ 12 $ 16 $ 20 $ 24 $ 28 Equilibrium GDP = $ 340 Equilibrium level of employment = 65 b.) What are the values of the MPC and MPS? MPC = 0.8 MPS = 0.2

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

Prices are fixed.

Suppose that a certain country has an MPC of 0.8 and a real GDP of $500 billion. If its investment spending decreases by $12 billion, what will be its new level of real GDP?

$440 Billion Explanation : First, we need to find the expenditure multiplier. The expenditure multiplier can be found by dividing 1 by 1 minus the marginal propensity to consume. The expenditure multiplier is 1/(1 − MPC). For our first value, we have an expenditure multiplier of 5 [= 1/(1 − 0.8)]. Second, to find the change in GDP, we take the expenditure multiplier and multiply this value by the change in investment: Change in GDP = 5 × (−$12 billion) = −$60 billion. Third, to find the new level of real GDP, we add the change to the original level of real GDP (note that when investment decreases the change is negative): New level of real GDP = $500 billion + (−$60 billion) = $500 billion − $60 billion = $440 billion.

Refer to the diagram for a private closed economy. Aggregate saving in this economy will be zero when

GDP is $60 billion.

The economy's current level of equilibrium GDP is $780 billion. The full-employment level of GDP is $800 billion. The multiplier is 4. Given those facts, we know that the economy faces __________ expenditure gap of __________.

a recessionary; $5 billion Definition: The correct answer is that the economy faces a recessionary expenditure gap of $5 billion. This is true because aggregate expenditures would have to be increased (and the aggregate expenditures curve shifted up vertically) by $5 billion in order to get the economy back to the full-employment level of GDP. We know this to be true because with a multiplier of 4 we would need to increase aggregate expenditures by $5 billion in order to close the $20 billion gap between the full-employment level of GDP ($800 billion) and the current equilibrium level of GDP ($780 billion). If the government could increase aggregate expenditures by $5 billion, the multiplier of 4 would increase that $5 billion initial increase in aggregate expenditures into a $20 billion total change in equilibrium GDP.

Other things equal, if a change in the tastes of American consumers causes them to purchase more foreign goods at each level of U.S. GDP, then

U.S. real GDP will fall.

If unintended increases in business inventories occur, we can expect

a decline in GDP and rising unemployment.

a. Saving is called a leakage because b. Planned investment is called an injection because c. Saving must equal planned investment at equilibrium GDP in a private closed economy because d. At equilibrium GDP, there will be

a. it is a removal from the flow of aggregate consumption. b. it is an addition to the flow of aggregate spending. c. spending and production will be the same, and there will be no unplanned inventory or GDP changes. d. no unplanned inventories and no unplanned investment.

Refer to columns 1 and 6 in the table below. a. Incorporate government into the table (in the gray-shaded cells) by assuming that it plans to tax and spend $20 billion at each possible level of GDP. Also assume that the tax is a personal tax and that government spending does not induce a shift in the private aggregate expenditures schedule. Instructions: Enter your answers as a whole number. b. What is the change in equilibrium GDP caused by the addition of government?

a.) (7) (8) 20 250 20 290 20 330 20 370 20 410 20 450 20 490 20 530 b.) 20 billion Explanation: a. To incorporate government expenditures into the table, we simply enter the amount of government expenditures ($20 billion) into each cell in column 7. (1) Real Domestic Output (GDP=DI), Billions(2) Aggregate Expenditures, Private Closed Economy, Billions(3) Exports,Billions(4) Imports,Billions(5) Net Exports, Private Economy, Billions(6) Aggregate Expenditures, Open Economy, Billions(7) Government Expenditures, Billions(8) Aggregate Expenditures, Open Economy with Government, Billions$ 200$ 240$ 20$ 30−$ 10$ 230$ 20$ 2502502802030−10270202903003202030−10310203303503602030−10350203704004002030−10390204104504402030−10430204505004802030−10470204905505202030−1051020530 b. The addition of government expenditures G to our analysis raises the aggregate expenditures (C + Ig + Xn + G) schedule and increases the equilibrium level of GDP. This change in government spending is subject to the multiplier effect. We can calculate the multiplier by first calculating the marginal propensity to consume (MPC). MPC is found by observing that aggregate expenditure is increasing by $40 billion for each $50 billion increase in GDP. The MPC must therefore be 0.8 (= 40/50). The multiplier = 1/(1 − MPC) = 1/(1 − 0.8) = 5. Thus, the $20 billion increase in government spending would increase equilibrium GDP by $100 billion [5 (multiplier) × $20 billion]. However, since the government is imposing a $20 billion personal tax to pay for the spending, we must consider the impact of the tax on the consumption component of aggregate expenditures and its effect on GDP. The $20 billion increase in T initially reduces consumption by $16 billion at every level of output [= 0.8 (MPC) × $20]. This $16 billion decline in turn reduces equilibrium GDP by $80 billion (= 5 (multiplier) × $16). The net change from this balance between government spending and taxes is $20 billion [= $100 billion (increase due to increase in G) − $80 billion (decrease in C due to increase in T)]. In other words, the addition of $20 billion of government expenditures and $20 billion of personal taxes has a net effect of increasing each amount of GDP in column 1 by $20 billion. Thus, equilibrium GDP would also increase by $20 billion from $350 billion to $370 billion.

Refer to the accompanying table in answering the questions that follow: (1) PLE, Millions (2) RDO, Billions (3) AE (Ca + Ig + Xn + G), Billions 90 $ 500 $ 520 100 $ 550 $ 560 110 $ 600 $ 600 120 $650 $640 130 $ 700 $ 680 Instructions: In parts a-c, enter your answers for the multiplier as a whole number. In part c, round your answers for the MPC and MPS to 1 decimal place. a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? - Recessionary expenditure gap What will be the consequence of this gap? - A shortfall in aggregate expenditures of $20 billion. Correct By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? Aggregate expenditures would have to increase by $ 20 Numeric Response 1.Edit Unavailable. 20 correct.billion. What is the multiplier in this example? 5 Numeric Response 2.Edit Unavailable. 5 correct. b. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is $500 billion? Inflationary expenditure gap Correct By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? Aggregate expenditures would have to decrease Correctby $ 20 Numeric Response 3.Edit Unavailable. 20 correct.billion. What is the multiplier in this example? 5 Numeric Response 4.Edit Unavailable. 5 correct. c. Assuming that investment, net exports, and government expenditures do not change with changes in real GDP, what are the sizes of the MPC, the MPS, and the multiplier? MPC = 0.8 Numeric Response 5.Edit Unavailable. 0.8 correct. MPS = 0.2 Numeric Response 6.Edit Unavailable. 0.2 correct. Multiplier = 5

a.) Recessionary expenditure gap A shortfall in aggregate expenditures of $20 billion

At equilibrium real GDP in a private closed economy,

aggregate expenditures and real GDP are equal.

a. A recessionary expenditure gap is the amount by which aggregate expenditures at the full-employment level of GDP b. An inflationary expenditure gap is the amount by which aggregate expenditures at the full-employment level of GDP c. A positive GDP gap is associated with d. A negative GDP gap is associated with

answers. a.) fall short of those required to achieve the full-employment level of GDP. b.) exceed those required to achieve the full-employment level of GDP. c.) an inflationary expenditure gap. d.) a recessionary expenditure gap.