Chapter 11
if the economy is operating below its full-employment level, the depreciation of the dollar will likely lead to:
-an increase in net exports and aggregate expenditures and an expansion of real GDP
investment is _____ of spending into the income-expenditure stream
-an injection
What outlets do firms have to sell their output?
-business markets -consumer markets
what are the two ways that equilibrium GDP will change in a private closed economy?
-changes in investment schedule -changes in consumption schedule
if an economy is operating at its full-employment level, a depreciation in the value of its currency will likely lead to _____
-demand-pull inflation
net exports are calculated as total ______ minus total ____ (do not use acronyms)
-exports -imports
equilibrium real GDP will decline when:
-imports are greater than exports
The Great Depression was worsened because of the imposition of a trade policy by the United States government that
increased tariffs on imports
when net exports increase or net imports decrease, this _____ aggregate expenditures and _____ the nation's GDP
increases; raises
when the level of GDP is below the equilibrium level, businesses will respond to the unplanned decline in business inventories by:
increasing output and employment
when the dollar depreciates relative to other currencies it enables people abroad to obtain _____ dollars with each unit of their own currency
more
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 the dollar ____ relative to other currencies it enables people abroad to obtain more dollars with each unit of their own currency
depreciates
a tax that yields the same amount of tax revenue at each level of GDP regardless of the level of government purchases is called
lump-sum tax
a _____ open economy includes both private and public (government) sectors
mixed
currently the country's GDP = $500B and the MPC = .90. if consumption spending increases by $15B, what is the country's new level of real GDP?
$650B
when potential output is $510B and the aggregate expenditures curve intersects the 45 degree line above $510B implying that equilibrium real GDP is greater than potential output, then there is a(n):
-inflationary gap and current employment is above full employment
when GDP is below equilibrium, higher levels of spending causes:
-inventory levels to fall and informs businesses to increase production levels toward equilibrium output
a $10billion change in investment will lead to a $50 billion change in output and income, therefore the:
-multiplier is 5
The MPC=.7 and government imposes a tax of $10B. Calculate the impact on aggregate expenditures
Aggregate expenditures fall by $7B
in a private closed economy, the formula for aggregate expenditures is:
C + Ig
the formula for equilibrium GDP in a mixed, open economy is
C9+I8+G+Xa
in a mixed open economy, equilibrium GDP is identified where:
S + T + M = I + G + X
using the graph provided, if real domestic output (GDP) was $430B what would have to happen to the C+Ig curve in order to reach equilibrium GDP?
The C + Ig curve would have to shift downward
the ______ helps to explain the situation of massive unemployment, as well as to better understand how an economy will react to such economic shocks as changes in tax rates as well as government and household spending
aggregate expenditure model
how is the aggregate expenditures schedule impacted graphically when government introduces a tax?
aggregate expenditures schedule shifts down by T*MPC
______ are included as part of U.S. GDP because they create jobs and income when purchased by foreigners
exports
a(n) ____ is the amount by which aggregate expenditures at the full-employment GDP exceed those required to achieve full-employment
inflationary gap
_____ is an injection into the income-expenditure circular flow
investment
the two compounds of aggregate expenditures in a private closed economy are consumption and gross private
investment
in an expanded economy, all of the following are leakages in an economy except:
investments
Saving is a(n) ______ or withdrawal of spending from the economy's circular flow of income and expenditures
leakage
if the rate of return on a firm's potential project or the real interest rate increases or decreases, the size of the effect this will have on the aggregate expenditures curve is based on the effect of the investment spending
multiplier
total tax revenues minus transfer payments is called ______ tax revenues
net
C + I9 + Xn = GDP is the formula for aggregate expenditures in a private ___ economy
open
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
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 exports are greater than imports, net exports will be:
positive
in a private closed economy the equilibrium GDP will change in response to changes in either:
the investment and consumption schedules
if the leakage of saving is greater than the injection of investment then:
there will be an above-equilibrium level of GDP
the level of investment spending by firms is based upon the current ______ interest rate together with the investment ______ curve
-real -demand
when net exports decrease or net imports increase, this ____ aggregate expenditures and _____ the nation's GDP
-reduces; lowers
in a private closed economy equilibrium GDP is $600B with a MPS=.20. when the country begins to trade, exports are $50B are imports are $40B. What is equilibrium GDP for this new private open economy and why?
$650B because net exports are positive
when government spending inceases by $20 billion and the multiplier is 4, there will be an increase in equilibrium real GDP of:
$80 billion
when the current production level of goods and services leads to output levels below GDP at equilibrium, this results in:
- a reduction of goods in inventory and too low a production rate
which of the following will result from the depreciation of the US dollar relative to other currencies?
-an increase in US net exports -a decrease in the price, in terms of the other currencies, of US goods
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
-consumption -investment
the aggregate expenditure schedule in a private closed economy is the sum of ____ plus planned ______.
-consumption; investment
the investment demand _____ and the real interest rate together determine the amount of investment spending while the investment _____ shows the amount of investment forthcoming at each level of GDP
-curve -schedule
a decrease in government spending by $10 billion with a multiplier of 5 will cause aggregate expenditures to:
-decline by $50B
in a closed economy, if households save $40 billion and firms investment $30 billion, then the level of real GDP will _____
-decrease
Keynes proposed what two different policies that a government might pursue to close a recessionary expenditure gap and achieve full employment?
-decrease taxes -increase government spending
when the government imposes a lump-sum tax on its citizens, this has the effect of _____ equilibrium real GDP by reducing both consumption and _____.
-decreasing -savings
When the United States' foreign trading partners experience higher incomes it benefits the U.S. by:
-increasing U.S. exports -increasing U.S. GDP -increasing U.S. income
suppose the real interest rate falls, causing businesses to increase investment spending. using the figure provided, what happens to the aggregate expenditures curve?
-it shifts upward to (C +Ig)1
aggregate expenditures and GDP will be decreased beyond what they would be in a closed economy with the addition of:
-negative net exports
which of the following is likely to occur when aggregate expenditures are so high that the equilibrium level of GDP is beyond the potential output?
-nominal GDP is likely to increase, but real GDP is not likely to increase -the economy is likely to experience demand-pull inflation -the economy is likely to produce either at potential or just above potential output
using the table provided, if planned investment by firms was $30B rather than $20B, the equilibrium level of output and employment
-output is $510B and employment is 75M
when government spending and taxes are equal, government spending will have a greater impact on aggregate expenditures and GDP because
-part of the tax is paid out of income that would otherwise have been saved -aggregate expenditures are impacted by only a fraction of the tax, T=MPC
during the 2007-2009 recession, which components of aggregate expenditures were significant contributors to the downturn?
-planned investment spending -consumption spending
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
-potential -full-employment -long-run
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.
-potential -long-run -full-employment
to completely construct the aggregate expenditures model we must move from a ___ (no government) open economy to a ____ economy that also includes the public sector (government)
-private;mixed
in a closed economy, two characteristics of equilibrium GDP are:
-saving and planned investment are equal -there are no unplanned changes in inventories
select the statements that best summarize the conditions present during the Great Depression
-surplus of productive resources -the unemployment rate was at double digits -real GDP was significantly below potential output
-firms are willing and able to produce any level of output as long as::
-the costs of producing the output are lower than the revenues from selling the output
the difference between an investment schedule and an investment demand curve is:
-the investment schedule is the amount of investment forthcoming at each level of GDP -the investment demand curve is based upon and determined by the real rate of interest
equilibrium GDP is the desirable level of output for which of the following reasons?
-there is no excess of total spending -there is no increase in inventories of goods -the total quantity of goods produced equals the total quantity of goods purchased
at levels above GDP at equilibrium, consumption underspending causes firms
-to reduce production output to move the level of GDP back to equilibrium
when sales fall short of planned production output, the unsold output is known as ___________ changes in inventory and is included in ______ investment.
-unplanned -actual
at equilibrium GDP in a mixed open economy
-unplanned inventories don't change
when there is overproduction of goods leading to output levels above GDP at equilibrium, this results in:
a piling up of unsold goods and a cutback in production rates
according to table 28.2, when real domestic output is at $470 billion, the tendency of employment, output and income is to be:
at equilibrium
an increase in lump-sum taxes will:
decrease equilibrium real GDP
the level of GDP at which the total quantity of goods produced equals the total quantity of goods purchased is the _____ level of output
equilibrium
a fundamental assumption behind the Keynesian aggregate expenditure model is that prices in the economy are:
fixed
when the U.S. _______, part of U.S. income must be subtracted from aggregate expenditures in order to avoid overstating the value of domestic production (investment) and domestic spending.
imports
an increase in government spending will shift the aggregate expenditure schedule upward, as well as _______ the equilibrium level of real GDP
increase
when GDP is ______ than its equilibrium level, businesses will raise the rate of production, leading to more employment and consequently raising the levels of consumption and income
less
a mixed economy is a(n) ______ economy that includes government spending and taxation
open
a private ___ economy is a private economy that includes international trade in its GDP
open
the amounts that business firms collectively intend to invest at each level of GDP is called their ______ investment
planned
aggregate expenditures and GDP will be increased beyond what they would be in a closed economy with the addition of:
positive net exports
which of the following is the most fundamental assumption behind the keynesian aggregate expenditure model?
prices in the economy are fixed
an economy that does not include government spending or international trade in their GDP is called a:
private closed economy
A(n) ______ is the amount by which aggregate expenditures at the full-employment GDP fall short of those required to achieve full-employment
recessionary gap
when potential output is $520B and the aggregate expenditures curve intersects the 45 degree line below $520B implying that equilibrium real GDP is less than potential output, then there is a(n):
recessionary gap and current employment is below full employment
when GDP is above equilibrium, firms will _______ the rate of production.
reduce
suppose country A and country B are trading partners. The imposition of tariffs by country A on goods from country B may not be a sound economic idea because it would likely lead to:
retaliation by country B
a withdrawal of spending from the economy's circular flow of income and expenditures is also called:
saving
in the income-expenditures circular flow, investment is a replacement for the leakage of
savings
if the economy is at equilibrium real GDP, then:
savings equals planned investment by businesses
when the leakages of savings are less than the injections of investment in the income-expenditure circular flow then:
there will be a below-equilibrium level of GDP