Chapter 29

Real GDP: $0 10 40 70 100 130 160 Consumption after taxes: -$20 0 20 40 60 80 100 Gross Investment: $10 10 10 10 10 10 10 Net Exports: $ + 5 + 5 + 5 + 5 + 5 + 5 + 5 Gov Purchases: $ 15, 15, 15, 15, 15, 15, 15 In the table above, if the full-employment real GDP is $100, the: A. inflationary expenditure gap is $30. B. inflationary expenditure gap is $10. C. recessionary expenditure gap is $30. D. recessionary expenditure gap is $10.

B. inflationary expenditure gap is $10.

12 In the aggregate expenditures model, technological progress will shift the investment schedule: A. downward and increase aggregate expenditures. B. downward and decrease aggregate expenditures. C. upward and increase aggregate expenditures. D. upward and decrease aggregate expenditures.

C. upward and increase aggregate expenditures.

15 . In the diagram above for a private closed economy, the upward shift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig)2 reflects: A. an increase in investment expenditures. B. a decrease in consumption expenditures. C. an increase in the MPC. D. an increase in the APS.

A. an increase in investment expenditures.

Ca= 25+0.75(Y-T) Ig= Ig)= 50 Xn=Xn0=10 G=G0=70 T=T0=30 The equilibrium level of GDP for this economy is: A. $600. B. $530. C. $415. D. $400.

B. $530.

18 Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by: A. $100 billion. B. $90 billion. C. $40 billion. D. $50 billion.

C. $40 billion.

If government desired to raise the equilibrium GDP to $650, it could: A. raise G by $45 and reduce T by $10. B. raise G by $40 and reduce T by $30. C. raise G by $30 or reduce T by $40. D. raise both G and T by $40.

C. raise G by $30 or reduce T by $40.

In a private closed economy, when aggregate expenditures exceed GDP: A. GDP will decline. B. business inventories will rise. C. saving will decline. D. business inventories will fall.

D. business inventories will fall.

(Last Word) In The General Theory of Employment, Interest, and Money: A. Adam Smith stated his idea of the invisible hand. B. Thorstein Veblen poked fun at the leisure class. C. John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself. D. J. B. Say developed "Say's law."

J. B. Say developed "Say's law."

Real GDP: $0 10 40 70 100 130 160 Consumption after taxes: -$20 0 20 40 60 80 100 Gross Investment: $10 10 10 10 10 10 10 Net Exports: $ + 5 + 5 + 5 + 5 + 5 + 5 + 5 Gov Purchases: $ 15, 15, 15, 15, 15, 15, 15 In the table above, equilibrium GDP is: A. $40. B. $70. C. $100. D. $130.

B. $70.

Real GDP: $0 10 40 70 100 130 160 Consumption after taxes: -$20 0 20 40 60 80 100 Gross Investment: $10 10 10 10 10 10 10 Net Exports: $ + 5 + 5 + 5 + 5 + 5 + 5 + 5 Gov Purchases: $ 15, 15, 15, 15, 15, 15, 15 In the table above, the after-tax MPC in the economy shown is: A. .5. B. .67. C. .75. D. .8.

B. .67.

C = 60 + .6Y I = I0 = 30 Refer to the data. The equilibrium level of income (Y) is: 60+0.8y+30 y=90+0.8y like terms .2y=90 A. 360 B. 225 C. 200 D. 135

B. 225

. Assume that in a private closed economy consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus: 300-290=10 A. saving is $10 billion. B. unplanned decreases in inventories of $10 billion will occur. C. the MPC is .80. D. unplanned increases in inventories of $10 billion will occur.

D. unplanned increases in inventories of $10 billion will occur.

3.By how much will GDP change if firms increase their investment by $8 billion and the MPC is .80? If the MPC is .67? LO5

Answer: $40; $24.24 Feedback: First, we need to find the expenditure multiplier. The expenditure multiplier can be found by dividing one by one minus the marginal propensity to consume. Expenditure multiplier = 1/(1-MPC) For our first value, we have an expenditure multiplier of 5 (= 1/(1-0.8)). For our second value, we have an expenditure multiplier of 3.0303 (= 1/(1-0.67)). Some students may round this 3. Second, to find the change in GDP we take the expenditure multiplier and multiply this value by the change in investment. For our first MPC value, the change in GDP equals $40 (= 5 x $8). For our second MPC, the change in GDP equals $24.24 (= 3.0303 x $8). Some students may round this answer to $24 (= 3 x $8).

What is a recessionary expenditure gap? An inflationary expenditure gap? Which is associated with a positive GDP gap? A negative GDP gap? LO6

Answer: A recessionary expenditure gap is the amount by which aggregate expenditures at the full employment GDP fall short of those required to achieve the full employment GDP. Insufficient total spending contracts or depresses the economy. This also is referred to as a negative GDP gap. Economists use the term inflationary expenditure gap to describe the amount by which an economy's aggregate expenditures at the full-employment GDP exceed those just necessary to achieve the full-employment level of GDP. This also is referred to as a positive GDP gap.

. Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in the private closed economy? LO4 a. A decline in the real interest rate. b. An overall decrease in the expected rate of return on investment. c. A sizeable, sustained increase in stock prices.

Answer: A. A. This will increase interestsensitive consumer purchases and investment, causing GDP to increase. b. Investment will decrease because of the lower expected rate of return, causing GDP to increase. c. By increasing consumption (because households will feel—or be—more wealthy, or because they are hopeful about an expansion) and by increasing investment, the AE schedule will shift upward, causing the GDP to increase.

Assuming the economy is operating below its potential output, what is the impact of an increase in net exports on real GDP? Why is it difficult, if not impossible, for a country to boost its net exports by increasing its tariffs during a global recession? LO6

Answer: Like consumption and investment, exports create domestic production, income, and employment for a nation. Although U.S. goods and services produced for export are sent abroad, foreign spending on those goods and services increases production and creates jobs and incomes in the United States. This implies that an increase in net exports results in an increase in aggregate expenditures and an increase in real GDP. However, the use of tariffs to accomplish this goal (boost net exports) will likely fail because other countries will respond in-kind. That is, if the United States increased tariffs to reduce imports (boost net exports) foreign countries will respond with tariffs on U.S. goods reducing exports from the U.S. (decrease in net exports).

Suppose that a certain country has an MPC of .9 and a real GDP of $400 billion. If its investment spending decreases by $4 billion, what will be its new level of real GDP? LO5

Answer: $360 Feedback: First, we need to find the expenditure multiplier. The expenditure multiplier can be found by dividing one by one minus the marginal propensity to consume. Expenditure multiplier = 1/(1-MPC) For our value, we have an expenditure multiplier of 10 (= 1/(1-0.9)). Second, to find the change in GDP we take the expenditure multiplier and multiply this value by the change in investment. Change in GDP = 10 x (-$4) = -$40 Third, to find the new level of real GDP we add the change to the original level of real GDP (note, when investment decreases the change is negative). New level of real GDP = $400 +(-$40) = $400 - $40 = $360

Which of the following statements is incorrect? A. Given the economy's MPS, a $15 billion reduction in government spending will reduce the equilibrium GDP by more than would a $15 billion increase in taxes. B. Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is .4.

B. Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is .4.

An upward shift of the aggregate expenditures schedule might be caused by: A. a decrease in exports, with no change in imports. B. a decrease in imports, with no change in exports. C. an increase in exports, with an equal decrease in investment spending. D. an increase in imports, with no change in exports.

B. a decrease in imports, with no change in exports.

An inflationary expenditure gap is the amount by which: A. equilibrium GDP falls short of the full-employment GDP. B. aggregate expenditures exceed any given level of GDP. C. saving exceeds investment at the full-employment GDP. D. aggregate expenditures exceed the full-employment level of GDP.

B. aggregate expenditures exceed any given level of GDP.

The recessionary expenditure gap associated with the recession of 2007-2009 resulted from: A. the government's attempt to control hyperinflation. B. a major increase in personal and corporate taxes. C. a rapid decline in investment spending. D. a rapid increase in imports resulting from large tariff reductions.

C. a rapid decline in investment spending.

Other things equal, a serious recession in the economies of U.S. trading partners will: A. have no perceptible impact on the U.S. economy. B. cause inflation in the U.S. economy. C. depress real output and employment in the U.S. economy. D. stimulate real output and employment in the U.S. economy.

C. depress real output and employment in the U.S. economy.

Real GDP: $0 10 40 70 100 130 160 Consumption after taxes: -$20 0 20 40 60 80 100 Gross Investment: $10 10 10 10 10 10 10 Net Exports: $ + 5 + 5 + 5 + 5 + 5 + 5 + 5 Gov Purchases: $ 15, 15, 15, 15, 15, 15, 15 In the table above, a decrease in government purchases of $5 would: A. increase real GDP by $5. B. increase real GDP by $10. C. decrease real GDP by $5. D. decrease real GDP by $15.

D. decrease real GDP by $15.