Macro Exam 3

lump-sum tax

a tax of a constant amount or, more precisely, a tax yielding the same amount of tax revenue at each level of GDP.

Positive net exports ________ aggregate expenditures relative to the closed economy and, other things equal, __________ equilibrium GDP.

increase, increase

the __________ exports and __________ imports will increase U.S. net exports and expand the nation's GDP.

increased, decreased

what is the recessionary expenditure gap?

A recessionary expenditure gap is the amount by which aggregate expenditures at the full-employment GDP fall short of those needed to achieve the full-employment GDP. This gap produces a negative GDP gap (actual GDP minus potential GDP).

Aggregate Expenditures Model

also known as the "Keynesian cross" model—is that the amount of goods and services produced and therefore the level of employment depend directly on the level of aggregate expenditures (total spending)

Any excess of planned investment over saving will cause

an excess of total spending, inducing GDP to rise.

Saving causes

consumption to be less than total output or GDP.

The inflationary expenditure gap depicted will cause

demand pull inflation

net exports

exports minus imports

what was Keynes suggestion for the negative GDP gap during the Great Depression?

government to increase aggregate expenditures. It could do this by increasing its own expenditures (G) or by lowering taxes (T) to increase after-tax consumption expenditures (Ca) by household, THIS WOULDN'T CREATE INFLATION

A private closed economy

has no taxes

an __________ in exports or a ___________ in imports— increases aggregate expenditures and expands GDP.

increase, decrease

exports _________ real GDP while imports __________ real GDP

increase, decrease

the amount households save

leakages

increased taxes ___________ equilibrium GDP.

reduce

in an open economy we assume that

the level of net exports is the same at all levels of real GDP.

At the equilibrium GDP, leakages of after-tax saving (Sa), imports (M), and taxes (T) equal injections of investment (Ig), exports (X), and government pur- chases

(G):Sa +M+T=Ig +Xn +G

This multiplier effect

(ΔGDP/ΔI )

Any excess of saving over planned investment will cause

a shortage of total spending, forcing GDP to fall

for an open economy, aggregate expen- ditures are

C + Ig + (X − M) x(exports) m(imports)

Real GDP=

disposable income ex: if $500 billion of output is produced as GDP, households will receive exactly $500 billion of disposable income that they can then consume or save.

A net export schedule

lists the amount of net exports that will occur at each level of GDP.

A shift in the investment schedule (caused by changes in expected rates of return or changes in interest rates) shifts

the aggregate ex- penditures curve and causes a new equilibrium level of real GDP.

Government purchases in the model of the mixed economy shift

the aggregate expenditures schedule upward and raise GDP

what is an inflationary expenditure gap?

the amount by which aggregate expen- ditures at the full-employment GDP exceed those just sufficient to achieve the full-employment GDP. This gap causes demand-pull inflation.

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.

Planned investment

the amount firms plan or intend to invest. we will assume that this planned investment is independent of the level of current disposable income or real output.

Keynes two policies that a government should do to close a recessionary expenditure gap

1) increase government spending 2) lower taxes both of these increase aggregate expenditures

Characteristics of equilibrium GDP(in private closed economy)

1)C+Ig=GDP 2)Saving and planned investment are equal (S = Ig). 3)There are no unplanned changes in inventories.

In Keynes aggregate expenditures model we assume that....

1)prices are fixed(to boost spending and maintain output and employment during depression models 2)we will assume (as Keynes did) that the presence of excess production capacity and unemployed labor implies that an increase in aggregate expenditures will increase real output and employment without raising the price level. 3)Real gdp=disposable income

equilibrium GDP is where(in a private closed economy)

C + Ig = GDP

no levels of GDP under equilibrium are sustainable because

GDP falls short of C+Ig, so C+Ig exceeds output

if C + Ig exceeds GDP, the economy will __________

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

Positive net exports _________ the aggregate expenditure schedule from the closed economy level of C + Ig to the open-economy level of C + Ig + Xn1

elevate

At equilibrium GDP, the amount households save (leakages) and the amount businesses plan to invest (injections) are _________

equal

when the expected rate of return on investment rises or that the real interest rate falls then investment spending

increases

A $20 billion increase in government purchases has increased equilibrium GDP by $80 billion (from $470 billion to $550 billion). The multiplier in this example is ___

4

Adding net exports of $5 billion has increased GDP by $20 billion, in this case implying a multiplier of ___

4

a $5 billion change in investment spending leads to a $20 billion change in output and income. What is the multiplier?

4 because 20/5

if government purchases were to decline from $20 billion to $10 billion, the equilibrium GDP would fall by _________

40 billion

Leakage

A withdrawal of potential spending from the income- expenditures stream via saving, tax payments, or imports; (2) a withdrawal that reduces the lending potential of the banking system.(Saving is a leakage or withdrawal of spending from the economy's circular flow of income and expenditures.)

Injection

An addition of spending into the income-expenditure stream: any increment to consumption, investment, government purchases, or net exports.(Investment—the purchases of capital goods—is therefore an injection of spending into the income- expenditures stream)

for a private closed economy, aggregate expenditures are

C+Ig

no levels of GDP above equilibrium are sustainable because

C+Ig falls short of GDP

In the open mixed economy, equilibrium GDP occurs where

Ca + Ig + Xn + G = GDP

In the complete aggregate expenditures model, equilibrium GDP occurs where

Ca + Ig + Xn + G = GDP.

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 (or ofaggregate expenditures). CHANGES IN INVENTORIES ARE APART OF INVESTMENT

Why does equilibrium real GDP occur where C + Ig = GDP in a private closed economy?

Equilibrium GDP equals consumption and investment because at this level of output, production creates sufficient total spending to purchase that output

S=

Ig(only in a private closed economy)

a $5 billion change in investment spending leads to a $20 billion change in output and income. What is the MPS?(pg 227 second side, last paragraph)

MPS equals change in savings over change in disposable income. The MPS is 0.25, meaning that for every $1 billion of new income, $0.25 billion of new saving occurs.

what is the multiplier effect?

The multiplier effect is the magnified increase in equilibrium GDP that occurs when any component of aggregate expenditures changes. The greater the MPC (the smaller the MPS), the greater the multiplier.

investment schedule

The tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests. The investment schedule shows the amount of investment forth- coming at each level of GDP.

Aggregate expenditures schedule

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

in this chapter we use a simple investment schedule in which investment is ....

a constant value and therefore the same at all levels of GDP.

Unplanned increases in inventories are followed by

a cutback in production and a decline of real GDP.

Any GDP for which saving exceeds investment is an

above-equilibrium GDP.

positive net exports increase ________________ and _____________ beyond what they would be in a closed economy.

aggregate expenditures and GDP

For a private closed economy the equilibrium level of GDP occurs when

aggregate expenditures and real output are equal or, graphically, where the C + Ig line intersects the 45° line

Real domestic output and aggregate expenditures make up the

aggregate expenditures schedule for the private closed economy

Positive net exports increase

aggregate expenditures to a higher level than they would if the economy were "closed" to international trade.

At any below-equilibrium GDP,

aggregate expenditures will exceed real output, resulting in un- planned disinvestment in inventories and eventual increases in GDP.

Unplanned decreases in inventories result in

an increase in production and a rise of GDP.

a _________ in exports or an __________ in imports—reduces aggregate expenditures and contracts a nation's GDP.

decrease, increase

Negative net exports ___________ aggregate expenditures relative to the closed economy and, other things equal, ___________ equilibrium GDP.

decrease, reduce

Any GDP for which investment exceeds saving is an

below-equilibrium GDP

In a private closed economy, the equilibrium GDP will change in response to

changes in either the investment sched- ule or the consumption schedule.

In a private closed economy, the two components of aggregate expenditures are

consumption(C) and gross investment(Ig)

decreases in exports or increases in imports have a

contractionary effect on GDP

The recessionary expenditure gap depicted will cause

cyclical unemployment

If the expected rate of return on investment decreases or if the real interest rate rises, investment spending will

decline

What were the adjustments made during the Great Depression?

declines in output and employment were the dominant adjustments (not decline in prices)

Negative net exports

decrease aggregate expenditures relative to the closed economy and, other things equal, reduce equilibrium GDP

Increases in exports or decreases in imports have an

expansionary effect on real GDP,

amount businesses plan to invest

injections

a private open economy incorporates

inports and exports

when unplanned changes in inventories are considered...

investment and saving are always equal, regardless of the level of GDP.

That constant value of investment is derived from the

investment demand curve by determining what quantity of investment will be demanded at the economy's current real interest rate.

Equilibrium occurs only when

planned investment and saving are equal

When economists say differences between investment and saving can occur and bring about changes in equilibrium GDP, they are referring to

planned investment saving

At any GDP greater than equilibrium GDP,

real output will exceed aggregate spending, resulting in unplanned investment in inventories and eventual declines in output and income (GDP)

what does taxation do?

reduces disposable income, lowers consumption and saving, shifts the aggregate expenditures curve downward, and re- duces equilibrium GDP.

Discuss the two other ways to characterize the equilibrium level of real GDP in a private closed economy:

saving = investment and no unplanned changes in inventories.

if the injection of investment exceeds the leakage of saving,

then C + I will be greater than GDP and drive GDP upward,

If the leakage of saving at a certain level of GDP exceeds the injection of investment,

then C + Ig will be less than GDP and that level of GDP cannot be sustained.

The aggregate expenditures model views what as the primary factor in determining the level of real GDP that the economy will produce?

total amount of spending in the economy