Module 8
tax multiplier
A ____________________ is the change in aggregate expenditure (total spending) resulting from an initial change in taxes.
recessionary gap
A ___is the amount by which aggregate expenditures fall short of the amount required to achieve full-employment equilibrium.
$25,000
. If the equilibrium level of real GDP is $100,000 below the full employment level of real GDP and the spending multiplier is 4, how much of an increase in autonomous aggregate expenditures (such as government spending) is required to move the equilibrium to the full-employment level of real GDP?
False
Decreasing transfer payments is one option to eliminate a recessionary gap.
$100,000
If the equilibrium level of real GDP is $400,000 above the full employment level of real GDP and the spending multiplier is 4, how much of a decrease in autonomous aggregate expenditures (such as government spending) is required to move the equilibrium down to the full-employment level of real GDP?
5
If the marginal propensity to consume (MPC) is 0.80, the value of the spending multiplier is:
It takes a larger increase in autonomous aggregate expenditures to shift equilibrium real GDP upward to the full-employment level.
If the marginal propensity to consume (MPC) shrinks, then which of the following is true?
False
If the marginal propensity to consume is 0.80, the value of the spending multiplier will be 4.
4
If the marginal propensity to save (MPS) is 0.25, the value of the spending multiplier is:
aggregate expenditures model
The determines the equilibrium level of real GDP by the intersection of the aggregate expenditures and aggregate output (and income) curves.
b. increased by $125 billion.
The equilibrium level of real GDP is $1,000 billion, the target full-employment level of real GDP is $1,500 billion, and the marginal propensity to consume is 0.75. The target can be reached if government spending is:
none of the answers above are correct
The formula to compute the spending multiplier is:
spending multiplier
The ratio of the change in real GDP to the initial change in any component of aggregate expenditures, including consumption, investment, government purchases, and net exports is called .
False
The size of the spending multiplier depends on the level of real GDP.
True
The spending multiplier also applies to investment spending by businesses.
False
The spending multiplier effect is the result of a movement along the aggregate expenditures (AE) line.
True
An increase in the marginal propensity to consume (MPC) leads to a increase in the spending multiplier.
$10 trillion
As shown in Exhibit 1, equilibrium GDP is:
accumulation of $12 trillion
As shown in Exhibit 1, if GDP is $14 trillion, the economy experiences unplanned inventory:
a depletion of $2 trillion
As shown in Exhibit 1, if GDP is $6 trillion, the economy experiences unplanned inventory:
downward shift in the aggregate expenditures curve
In the aggregate expenditures model, a tax increase causes a (an):
a. upward shift in the aggregate expenditures curve.
In the aggregate expenditures model, an increase in government spending causes
True
In the aggregate expenditures model, if aggregate expenditures (AE) are less than GDP, then GDP decreases.
False
In the aggregate expenditures model, if aggregate expenditures (AE) equals $7 trillion and GDP equals $8 trillion, then inventory depletion equals $1 trillion.
False
In the aggregate expenditures model, if an economy operates below equilibrium GDP, there will be unplanned inventory accumulation.
inventory is depleted
In the aggregate expenditures-output model, if aggregate expenditures (AE) are greater than GDP, then:
All of the answers are correct
In the aggregate expenditures-output model, if an economy operates above equilibrium GDP, there will be:
False
Increasing transfer payments is one option to eliminate an inflationary gap.
inflationary gap
The amount by which aggregate expenditures exceed the amount required to achieve full-employment equilibrium is called .
None of the answers are correct
Use the aggregate expenditures model and assume an economy is in equilibrium at $5 trillion which is $250 billion below full-employment GDP. If the marginal propensity to consume (MPC) is 0.60, full-employment GDP can be reached if government spending
None of the answers are correct
Use the aggregate expenditures model and assume an economy is in equilibrium at $6 trillion which is $500 billion above full-employment GDP. If the marginal propensity to consume (MPC) is 0.75, full-employment GDP can be reached if government spending:
None of the answers are correct
Use the aggregate expenditures model and assume the marginal propensity to consume (MPC) is 0.80. A decrease in government spending of $1 billion would result in a decrease in GDP of:
None of the answers are correct
Using C to represent consumption, I to represent investment, G to represent government spending, S to represent saving, X to represent exports, and M to represent imports, aggregate expenditures can be represented by:
inflationary gap
Using the aggregate expenditure model, assume the aggregate expenditures (AE) line is above the 45-degree line at full-employment GDP. This vertical distance is called a
None of the answers above are correct
Which of the following options could be used to eliminate a recessionary gap?