Chapter 29 ECON Assignment

Equilibrium real GDP occurs where C + Ig = GDP in a private closed economy because

at this level of output, production creates sufficient total spending to purchase that output

If the multiplier is 5 and investment increases by $3 billion, equilibrium real GDP will increase by:

$15 billion

A positive GDP gap is associated with

an inflationary expenditure gap

ADVANCED ANALYSIS Assume that the consumption schedule for a private open economy is such that consumption is: C = 80 + 0.75Y Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 50 and Xn = 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig + G + Xn a. What is the equilibrium level of income or real GDP for this economy? Equilibrium GDP (Y) = $ ______ b. What happens to equilibrium Y if Ig changes to 30? Equilibrium GDP (Y) = $ ______ What does this outcome reveal about the size of the multiplier? Multiplier = _____

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Incorporate government into the table by assuming that it plans to tax and spend $28 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. What is the change in equilibrium GDP caused by the addition of government? $_____ billion.

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If the slope of the aggregate expenditures schedule were 0.8, what is the multiplier?

5

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?

A decline in the real interest rate will cause GDP to [increase]. An overall decrease in the expected rate of return on investment will cause GDP to [decrease]. A sizeable, sustained increase in stock prices will cause GDP to [increase].

The aggregate expenditures model assumes flexible prices.

False

If spending exceeds output, real GDP will decline as firms cut back on production.

False This statement is false because if spending exceeds output, inventories will be falling. That will serve as a signal for firms to increase production. Thus, the times when spending exceeds output are the times when we can expect real GDP to increase.

Suppose that a certain country has an MPC of 0.9 and a real GDP of $500 billion. If its investment spending decreases by $10 billion, what will be its new level of real GDP?

Real GDP = $ ____ billion.

Assuming the level of investment is $24 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. a. Equilibrium GDP = $ ___ billion Equilibrium level of employment = __ million b. What are the sizes of the MPC and MPS?

Saving, Billions (top to bottom): -4, 0, 4, 8, 12, 16, 20, 24, 28 a. $340 billion; 65 million b. MPC = .8 MPS = .2

A negative GDP gap is associated with

a recessionary expenditure gap

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

The data in columns 1 and 2 in the table below are for a private closed economy. a. 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 the gray shaded cells in columns 5 and 6. Determine the equilibrium GDP for the open economy. $ billion. What is the change in equilibrium GDP caused by the addition of net exports? c. Given the original $30 billion level of exports, what would be net exports and the equilibrium GDP if imports were $10 billion less at each level of GDP? Fill in the gray shaded cells. Equilibrium GDP = $____ billion. d. What is the multiplier in this example?

a. $400 billion b. c. d. 5

Answer the following questions, which relate to the aggregate expenditures model: a. Given the following: Ca = $110, Ig = $60, Xn = − $10, and G = $40, What is the economy's equilibrium GDP? Equilibrium GDP = $ _____ b. If real GDP in an economy is currently $230, will the economy's real GDP rise, fall, or stay the same? c. Suppose that full-employment (and full-capacity) output in an economy is $230. If Ca = $160, Ig = $60, Xn = − $10, and G = $40, What will be the macroeconomic result?

a. - b. Real GDP will fall c. There is an inflationary expenditure gap and employment levels are above the full-employment level.

Assume that, without taxes, the consumption schedule of an economy is as follows: (graph) a. What is the value of the MPC? b. Assume now that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all levels of GDP. Add the after-tax consumption to the table below. Compare the MPC and the multiplier with those of the pretax consumption schedule. MPC after tax = Multiplier after tax = The MPC and multiplier are:

a. MPC = .8 b. [graph values]; MPC = Multipler = MPC & multipler = the same before and after the tax

Refer to the accompanying table in answering the questions that follow: a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary expenditure gap or the recessionary expenditure gap? Aggregate expenditures would have to __________ by $ _____ billion. What is the multiplier in this example? b. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is $550 billion? 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 ________ by $ ____ billion. What is the multiplier in this example? 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?

a. Recessionary expenditure gap 20 million shortfall of employment increase by $ _____ billion - b. Inflationary expenditure gap decrease by $ ___ billion - c. MPC = MPS = Multipler =

a. Using the above consumption and saving data and assuming investment is $19 billion, what are saving and planned investment at the $390 billion level of domestic output? b. What are saving and actual investment at that level? c. What are saving and planned investment at the $350 billion level of domestic output? d. What are the levels of saving and actual investment? e. In which direction and by what amount will unplanned investment change as the economy moves from the $390 billion level of GDP to the equilibrium level of real GDP? f. From the $350 billion level of real GDP to the equilibrium level of GDP?

a. Saving = $ ___ billion. Planned investment = $ ___ billion. b. Saving = $ ___ billion. Actual investment = $ ___ billion. c. Saving = $ ___ billion. Planned investment = $ ___ billion. d. Saving = $ ___ billion. Actual investment = $ ___ billion e. Unplanned inventories will [FALL] by $ ___ billion f. Unplanned inventories will [RISE] by $ ___ billion.

a. By how much will GDP change if firms increase their investment by $13 billion and the MPC is 0.8? b. If the MPC is 0.5?

a. The change in GDP = $ ____ billion. b. The change in GDP = $ ____ billion.

If C + Ig exceeds GDP, the economy will

draw down inventories faster than planned, ordering will increase, and real GDP will rise

An inflationary expenditure gap is the amount by which aggregate expenditures at the full employment GDP

exceed those required to achieve the full employment GDP

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

exceeds; reducing

If the slope of the aggregate expenditures schedule were 0.8, and aggregate expenditures declined by $4 billion, real GDP would

fall by $20 billion

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

If total spending is just sufficient to purchase an economy's output, then the economy is:

in equilibrium

Assuming the economy is operating below its potential output, an increase in net exports will

increase aggregate expenditures and real GDP

Shown below is the aggregate expenditures model composed of consumption and investment spending for a closed economy. Show the effect of a $500 addition in government spending. Looking at your graph, determine whether equilibrium GDP has increased, decreased, or stayed the same given the size of the government purchases that you selected. Equilibrium GDP has _________ by $ ___.

increased; 750

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

Saving is called a leakage because it

is a removal from the flow of aggregate consumption

Planned investment is called an injection because it

is an addition to the flow of aggregate spending

It is difficult, if not impossible, for a country to boost its net exports by increasing its tariffs during a global recession. This is because other countries will respond in-kind by

lowering U.S. exports and net exports

The expenditure components of real GDP purposely excluded in a private closed economy are

net exports and the government sector

At equilibrium GDP, there will be

no unplanned inventories and no unplanned investment

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

reduce; reduce; reduce

Saving must equal planned investment at equilibrium GDP in the private closed economy because when this is so,

spending and production will be the same, and there will be no unplanned inventory, or GDP, changes

Say's law says The view held by classical economists is that the economy will operate Keynes's view is that the economy can operate

supply creates its own demand at full employment on the production possibilities curve with some unemployment inside the production possibilities curve

A decrease in the aggregate expenditures causes a decline in real GDP that is greater than the decline in the aggregate expenditures schedule because

the decrease in the aggregate expenditures is multiplied into a larger change in real GDP

The investment demand schedule shows

the level of investment spending for a given level of GDP

The magnitude of the drop in real GDP that will occur when aggregate expenditures fall depends on

the size of the marginal propensity to consume