Macro: Ch 29- The Aggregate Expenditures Model

investment schedule

a table of numbers that shows the amounts firms plan to invest at various possible values of of real gross domestic product

An economy that includes consumption spending, investment spending, government spending, taxes and international trade is called a:

mixed economy

A negative GDP gap is associated with a production expenditure gap. an inflationary expenditure gap. a consumption expenditure gap. a recessionary expenditure gap.

a recessionary expenditure gap.

The investment _______ shows the amount of investment forthcoming at each level of GDP.

schedule

lump-sum tax

A tax of a constant amount.

What outlets do firms have to sell their output?

Business markets; Consumer markets

aggregate expenditures schedule

Shows the amount (C + Ig) that will be spent at each possible output or income level.

recessionary expenditure gap

The amount by which aggregate expenditures at the full-employment GDP fall short of those required to achieve the full-employment GDP.

inflationary expenditure gap

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.

Equilibrium GDP is the desirable level of output for which of the following reasons?

There is not an increase in inventories of goods. The total quantity of goods produced equals the total quantity of goods purchased. There is not an excess of total spending.

leakage

Withdrawal of spending from the economy's circular flow of income and expenditures.

When government spending and taxes are equal, government spending will have a greater impact on aggregate expenditures and GDP because:

aggregate expenditures are impacted by only a fraction of the tax, T*MPC; part of the tax is paid out of income that would otherwise have been saved

planned investment

amounts business firms collectively intend to invest at each level of GDP

injection

an addition of spending into the income-expenditure stream: any increment to consumption (C), investment (Ig), Government purchases (G), or net exports (Xn)

unplanned changes in inventories

changes in inventories that firms did not anticipate; changes in inventories that occur because of unexpected increases or decreases of aggregate spending

What are the two ways that equilibrium GDP will change in a private closed economy?

changes in investment schedule; changes in consumption schedule

The aggregate expenditure schedule in a private closed economy is the sum of _______ plus planned _______.

consumption; investment

The formula for aggregate expenditures in an open mixed economy is _______+_______+_______+_______ = GDP.

consumption; investment; government spending; net exports

An inflationary expenditure gap is the amount by which aggregate expenditures at the full employment GDP equal those required to achieve the full employment GDP. exceed those required to achieve the full employment GDP. divided by the multiplier equal those required to achieve the full employment GDP. fall short of those required to achieve the full employment GDP.

exceed those required to achieve the full employment GDP.

net exports (Xn)

exports minus imports (X - M)

A recessionary gap is the amount by which aggregate expenditures at full-employment GDP _______ those required to achieve full-employment GDP.

fall short of

A recessionary expenditure gap is the amount by which aggregate expenditures at the full employment GDP divided by the multiplier equal those required to achieve the full employment GDP. fall short of those required to achieve the full employment GDP. exceed those required to achieve the full employment GDP. equal those required to achieve the full employment GDP and net exports.

fall short of those required to achieve the full employment GDP.

A fundamental assumption behind the Keynesian aggregate expenditure model is that prices in the economy are:

fixed

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; increasing decreasing; decreasing increasing; decreasing decreasing; increasing

increasing; decreasing

The two components of aggregate expenditures in a private closed economy are consumption and gross private _______.

investment

Using the figure provided, it is evident that no levels of GDP above equilibrium are sustainable because _______ and ________ (no abbreviations) spending fall short of GDP.

investment; consumer

Saving is called a leakage because it is a removal from the flow of aggregate consumption. goes directly to investment. is less than consumption. is put into the banking system.

is a removal from the flow of aggregate consumption.

Planned investment is called an injection because it is greater than consumption. goes directly to profit levels. comes from the banking system. is an addition to the flow of aggregate spending.

is an addition to the flow of aggregate spending.

When exports are greater than imports, net exports will be:

positive

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

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

The amount spent on imported goods in the U.S. must be subtracted from exports or total spending because:

such spending generates production and income abroad

Say's law says supply will equal demand. supply and demand create GDP. demand creates its own supply. supply creates its own demand.

supply creates its own demand.

It is undesirable for actual GDP to be less than the equilibrium level because there will be a(n):

unplanned decline in business inventories

When sales fall short of planned production output, the unsold output is known as _______ changes in inventory and is included in ______ investment.

unplanned; actual

The net export schedule lists the amount of net exports that will occur at each level of _______.

GDP

equilibrium GDP

GDP = C(consumers) + Ig(investments)

Keynes proposed what two different policies that a government might pursue to close a recessionary expenditure gap and achieve full employment?

Increase government spending; Decrease taxes

A positive GDP gap is associated with a recessionary expenditure gap. a consumption expenditure gap. a production expenditure gap. an inflationary expenditure gap.

an inflationary expenditure gap.

Investment is _______ of spending into the income-expenditure stream.

an injection

The view held by classical economists is that the economy will operate without constraints on the production possibilities curve. with no unemployment on the production possibilities curve. with maximum efficiency within the production possibilities curve. at full employment on the production possibilities curve.

at full employment on the production possibilities curve.

Equilibrium real GDP occurs where C + Ig = GDP in a private closed economy because this is where GDP equals the value of income. at this level of output, consumption creates sufficient total spending to purchase that spending level. this is where GDP equals the value of production. at this level of output, production creates sufficient total spending to purchase that output.

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

When the level of GDP is above the equilibrium level, businesses will respond to the unintended accumulation of unsold goods by:

decreasing the rate of production

When GDP is _______ its equilibrium level, businesses will raise the rate of production, leading to more employment and consequently raising the levels of consumption and income.

below

If C + Ig exceeds GDP, the economy will accumulate unplanned inventories, ordering will increase, and real GDP will rise. draw down inventories faster than planned, ordering will increase, and real GDP will rise. draw down inventories faster than planned, ordering will slow, and real GDP will fall. accumulate unplanned inventories, ordering will slow, and real GDP will fall.

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

Although an economy may be at equilibrium GDP on the aggregate expenditure model, this does not mean that the economy is also at _______ real GDP.

full-employment; potential

A private closed economy is one without international trade or _______ spending.

government

If total spending is just sufficient to purchase an economy's output, then the economy is: in expansion. in debt. in recession. in equilibrium.

in equilibrium.

Assuming the economy is operating below its potential output, an increase in net exports will increase aggregate expenditures but decrease real GDP. increase aggregate expenditures and real GDP. decrease aggregate expenditures but increase real GDP. decrease aggregate expenditures and real GDP.

increase aggregate expenditures and real GDP.

Although an economy may be at equilibrium GDP on the aggregate expenditures model, this does not mean that the economy is also at _______ real GDP.

long-run; potential; full-employment

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 increasing U.S. imports and net exports. increasing U.S. exports and net exports. lowering U.S. exports and net exports. lowering U.S. imports and net exports.

lowering U.S. exports and net exports.

A tax that yields the same amount of tax revenue at each level of GDP regardless of the level of government purchases is called a:

lump-sum tax

A(n) _______ open economy includes both private and public (government) sectors.

mixed

The expenditure components of real GDP purposely excluded in a private closed economy are investment and net exports. saving and investment. the government sector and investment. net exports and the government sector.

net exports and the government sector.

C + Ig + Xn = GDP is the formula for aggregate expenditures in a private _______ economy.

open

The amounts that business firms collectively intend to invest at each level of GDP is called their _______ investment.

planned

During the 2007-2009 recession, which components of aggregate expenditures were significant contributors to the downturn?

planned investment spending; consumption

In a private closed economy, C + Ig = GDP, but two other characteristics of GDP at equilibrium are that saving and _______ investment are equal and there are no _______ changes in inventories.

planned; unplanned

The level of investment spending by firms is based upon the current _______ interest rate together with the investment _______ curve.

real; demand

When the government imposes a lump-sum tax on its citizens, this has the effect of _______ equilibrium real GDP by reducing both consumption and _______.

reducing; savings

A withdrawal of spending from the economy's circular flow of income and expenditures is also called:

saving

In the income-expenditure circular flow, investment is a replacement for the leakage of _______.

savings

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. consumers will decide to spend less if aggregate expenditures decline. Congress will act to lower real GDP. people will decide to save more.

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

C + Ig = GDP is:

the formula for aggregate expenditures in a closed economy

The investment demand schedule shows how expected rates of profit and real interest rates determine the level of GDP. how expected rates of profit and real interest rates determine the level of investment spending. the level of investment spending for a given level of GDP. the level of investment spending for a given level of saving.

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

The level of investment and spending by firms and the investment demand curve are based upon:

the real interest rate

The magnitude of the drop in real GDP that will occur when aggregate expenditures fall depends on how quickly the fall in aggregate expenditures occur. the time of year when aggregate expenditures fall. whether or not taxes change. the size of the marginal propensity to consume.

the size of the marginal propensity to consume.

Exports are included as a component of US aggregate expenditures because:

these are goods and services that created income in the US

Keynes's view is that the economy can operate with no unemployment on the production possibilities curve. without constraints on the production possibilities curve. with some unemployment inside the production possibilities curve. at full employment on the production possibilities curve.

with some unemployment inside the production possibilities curve.