MACRO Chapter 11

A $10 billion change in investment will lead to a $50 change in output and income, therefore the multiplier is ?

5

The aggregate expenditures model is built upon which of the following assumptions? A) Prices are fixed. B) The economy is at full employment. C) Prices are fully flexible. D) Government spending policy has no ability to affect the level of output.

A

________ _______ gap is 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

An inflationary expenditure

Exports have the same effect on the current size of GDP as: A) imports. B) investment. C) taxes. D) saving.

B

Other things equal, the slope of the aggregate expenditures schedule will increase as a result of: A) a decline in the size of the inflationary gap. B) an increase in the MPC. C) an increase in the MPS. D) a decline in the general price level.

B

In a mixed open economy, if aggregate expenditures exceed GDP: A) Ig + X + G = Ca. B) Ca + Ig + Xn + G < domestic output. C) Ig > S. D) Ig + X + G > Sa + M + T.

D

MPC= ∆?/∆?

∆C/∆GDP

In the private closed economy, the two components of aggregate expenditures are _________ and ________ We assume that real GDP = ? Equilibrium GDP= ?

consumption, C, and gross investment, Ig Real GDP= DI Equilibrium GDP = C+Ig

_________ ________ gap is the amount by which aggregate expenditures at the full-employment GDP fall short of those required to achieve the full-employment GDP

A recessionary expenditure

Other things equal, the multiplier effect associated with a change in government spending is: A) the same as that associated with a change in taxes. B) equal to that associated with a change in investment or consumption. C) less than that associated with a change in investment. D) greater than that associated with a change in investment.

B

The MPC=.7 and government imposes a tax of $10B. Calculate the impact on aggregate expenditure A) Aggregate expenditure increase by $7B B) Aggregate expenditure decrease by $7B

B

Demand Pull ? Cost-push?

Consumers want to purchase more output than can be produced which drives prices up (Demand or AD) Prices have been pushed up due to increased cost of production (Supply or AS)

Gross Investment: A) Is positively related to the level of GDP B) Is negatively related to the level of GDP C) Is independent of GDP

A

If at some level of GDP the economy is experiencing an unintended decrease in inventories: A) the aggregate level of saving will decline. B) the price level will fall. C) the business sector will lay off workers. D) domestic output will increase.

D

Which of the following would reduce GDP by the greatest amount? A) A $20 billion increase in taxes. B) $20 billion increases in both government spending and taxes. C) $20 billion decreases in both government spending and taxes. D) A $20 billion decrease in government spending.

D

Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion. If the MPC is .625, what change in aggregate expenditures is needed to achieve full employment? A) A decrease of $12 billion. B) An increase of $25 billion. C) An increase of $10 billion. D) An increase of $15 billion.

D MPSxDifference

At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be: A) $138 billion. B) $126 billion. C) $38 billion. D) $180 billion.

C

In a private closed economy, when aggregate expenditures equal GDP: A) consumption equals investment. B) consumption equals aggregate expenditures. C) planned investment equals saving. D) disposable income equals consumption minus saving.

C

When savings exceeds investment there is an (Increase/decrease) in GDP

Decrease

Keynes' solution to a recessionary expenditure gap The first is to _______ _________ spending. The second is to ______ ______. Both work by __________ aggregate expenditures

The first is to increase government spending. The second is to lower taxes. Both work by increasing aggregate expenditures

A _____ gap is the amount by which aggregate expenditure at full employment GDP fall short of those required to achieve full employment

Recessionary

_______ is a leakage or withdrawal of spending from the economy's circular flow of income and expenditures. ______ is an injection of spending into the income-expenditures stream

Savings Investment

In a private closed economy, C+Ig=GDP, but two other characteristics of GDPat equilibrium are that _____ and planned investment are equal and there are no _______ changes in inventory

Savings Unplanned

Only where S = ? will aggregate expenditures (C + Ig) equal real output (GDP)

Ig

A private closed economy is one without _______ trade or ______ spending

International Government

The higher the unemployment rate, the ______ the GDP gap

Larger

When aggregate expenditures schedule lies below the 45 degree line it means aggregate expenditures are _____ than GDP and inventories are _______

Less Raising

If MPC = .5, a simultaneous increase in both taxes and government spending of $20 will

Given MPC =0.5 , Multiplier = 1/(1-0.5) = 2 Effect of ∆ G: ∆GDP = multiplier*∆G ∆GDP = 2*20 = +$40 Effect of Tax increase: ∆GDP = multiplier* ∆C ∆GDP = multiplier(T*MPC) ∆GDP = 2*(20*0.5) = -$20 Net effect of G and T = (+40 ) +(-20) = +20

GDP=300 MPC=.6 G= 80 If there was a $100 tax imposed then GDP would be?

Multiplier= 2.5 Since tax=100 then DI decreases 100 100 x .6= 60 C=60 G-C= 80-60= 20 20 x 2.5=50 300 + 50 = New GDP 350

When adding Xn (C+Ig+Xn) we must find the difference between imports and exports, then ..... to find new GDP

Multiply by multiplier

Whats the difference between open and closed economy?

Open economy deals with other countries so includes Xn

Aggregate expenditure schedule reflects the total amount that will be spent at each possible _______ or _______ level

Output or input

Prosperity abroad generally _____ our exports and transfers some of their prosperity to us

Raises

Investment demand curve is based upon and determined by the real _____ of ______ The investment schedule is the amount of ________ forthcoming at each level of _______

Rate of interest Investment GDP