Macroeconomics Test #2

net export schedule is

lists the amount of net exports that will occur at each level of GDP

planned investment is

the amount that firms plan or intend to invest

Leakage is

(1) A withdrawal of potential spending from the income-expenditures stream via saving, tax payments, or imports

Analyze how changes in equilibrium real GDP can occur in the aggregate expenditures model and describe how those changes relate to the multiplier.

A shift in the investment schedule (caused by changes in expected rates of return or changes in interest rates) shifts the aggregate expenditures curve and causes a new equilibrium level of real GDP. Real GDP changes by more than the amount of the initial change in investment. This multiplier effect (ΔGDP/ΔIg) accompanies both increases and decreases in aggregate expenditures and also applies to changes in net exports (Xn) and government purchases (G).

Aggregate Expenditures Schedule

A table of numbers showing the total amount spent on final goods and final services at different levels of real gross domestic product (real GDP).

Injection is

An addition of spending to the income-expenditure stream: investment, government purchases, and net exports.

Explain how an economy's investment schedule is derived from the investment demand curve and an interest rate.

An investment schedule shows how much investment the firms in an economy are collectively planning to make at each possible level of GDP. In this chapter, we utilize a simple investment schedule in which investment is a constant value and therefore the same at all levels of GDP.

Discuss the two other ways to characterize the equilibrium level of real GDP in a private closed economy: saving = investment and no unplanned changes in inventories.

At equilibrium GDP, the amount households save (leakages) and the amount businesses plan to invest (injections) are equal. Any excess of saving over planned investment will cause a shortage of total spending, forcing GDP to fall. Any excess of planned investment over saving will cause an excess of total spending, inducing GDP to rise. The change in GDP will in both cases correct the discrepancy between saving and planned investment.

unplanned changes in inventory

Changes in inventories that firms did not anticipate; changes in inventories that occur because of unexpected increases or decreases of aggregate spending (or of aggregate expenditures).

C + Ig = GDP is

Equilibrium GDP formula

Illustrate how economists combine consumption and investment to depict an aggregate expenditures schedule for a private closed economy and how that schedule can be used to demonstrate the economy's equilibrium level of output (where the total quantity of goods produced equals the total quantity of goods purchased).

For a private closed economy the equilibrium level of GDP occurs when aggregate expenditures and real output are equal or, graphically, where the C + Ig line intersects the 45° line. At any GDP greater than equilibrium GDP, real output will exceed aggregate Page 239 spending, resulting in unplanned investment in inventories and eventual declines in output and income (GDP). At any below-equilibrium GDP, aggregate expenditures will exceed real output, resulting in unplanned disinvestment in inventories and eventual increases in GDP.

Explain how economists integrate the public sector (government expenditures and taxes) into the aggregate expenditures model.

In the complete aggregate expenditures model, equilibrium GDP occurs where Ca + Ig + Xn + G = GDP. At the equilibrium GDP, leakages of after-tax saving (Sa), imports (M), and taxes (T) equal injections of investment (Ig), exports (X), and government purchases (G): Sa + M + T = Ig + Xn + G. Also, there are no unplanned changes in inventories

Two characteristics of Equilibrium GDP

Saving and planned investment are equal There are no unplanned changes in inventories.

Equilibrium GDP

The GDP at which the total quantity of final goods and services purchased is equal to the total quantity of final goods and services produced.

Explain how sticky prices relate to the aggregate expenditures model.

The aggregate expenditures model views the total amount of spending in the economy as the primary factor determining the level of real GDP that the economy will produce. The model assumes that the price level is fixed. Keynes made this assumption to reflect the general circumstances of the Great Depression, in which declines in output and employment, rather than declines in prices, were the dominant adjustments made by firms when they faced huge declines in their sales.

Inflationary expenditure gap is

The amount by which the aggregate expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary level.

recessionary expenditure gap is

The amount by which the aggregate expenditures schedule must shift upward to increase the real GDP to its full-employment, noninflationary level.

Explain how economists integrate the international sector (exports and imports) into the aggregate expenditures model.

The net export schedule in the model of the open economy relates net exports (exports minus imports) to levels of real GDP. For simplicity, we assume that the level of net exports is the same at all levels of real GDP.