The Aggregate Expenditures Model
The great depression was worsened because of the imposition of the trade policy by the United States government that
Increase tariffs on import
Ina closed economy, two characteristics of equilibrium GDP are:
There are no unplanned changes in inventories Savings and planned investment are equal
Which of the following 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 good
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
GDP _______ is the desired level of output because total spending is just sufficient to purchase total output
at equilibrium
The aggregate expenditure schedule in a private closed economy is the sum of planned ____________.
consumption; government spending
The investment demand ________ and the real interest rate together determine the amount if investment spending while the investment ___________ shows the amount of investment forthcoming at each level of GDP.
curve; schedule
Equilibrium real GDP will ------- when imports are greater than exports
decline
If the economy is operating at its full-employment level, depreciation of the dollar will likely lead to:
demand pull inflation
unplanned inventories At equilibrium GDP in a mixed open economy:
don't change
The level of GDP at which the total quantity of goods produced equals the total quantity of goods purchased is the ______________ level of the output.
equilibrium
___________ are included as part of U.S GDP because they create jobs and income when purchased by foreigners.
exports
A private closed economy is one without international trade or __________ spending.
government
An increase in government spending will shift the aggregate expenditure schedule upward, as well as ___________ the equilibrium level of real GDP.
increase
When net exports increase or net imports decrease, this _____________ aggregate expenditures and _________ the nation's GDP.
increases; raises
When the United states' foreign trading partners experience higher incomes it benefits the U.S by:
increasing U.S. income increasing U.S. GDP increasing U.S. exports
A(n) ___________ is the amount by which aggregate expenditures at the full employment GDP exceed those required to achieve full-employment
inflationary gap
When GDP is below equilibrium, higher levels of spending causes:
inventory levels to fall and informs businesses to increase production levels toward equilibrium output
The two components of aggregate expenditures in a private closed economy are consumption and gross private ___________.
investment
The two components of aggregate expenditures in a private closed economy are consumption and gross private ____________.
investment
__________ is an injection into the income-expenditure circular flow
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
When GDP is _____ than its equilibrium level, business will raise the rate of production, leading to more employment and consequently raising the levels of consumption and income.
less
A tax that yields the same amount of tax revenue of each level of GDP regardless of the level of government purchases is called a
lump sum tax
If the rate of return on a firms 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
A private ______ economy is a economy that includes international trade in its GDP.
open
A private _______ economy is an economy that includes international trade in its GDP.
open
The amount that business firms collectively intend to invest at each level of GDP is called their _____________ investment.
planned
The amounts that business firms collectively intend to invest at each level of GDP is called their _________ investment
planned
When exports are greater than imports, net exports will be
positive
Aggregate expenditures and GDP will be increased beyond what they would be in a closed economy with the addition of:
positive net exports
The aggregate expenditure model can be used to explain short-run adjustment in:
private and public spending
An economy that does not include government spending or international trade in their GDP is called
private closed economy
When GDP is above equilibrium firms will ________ the rate of production.
reduce
Firms are willing and able to produce any level of output as log as:
the costs of producing of output is at minimum and the profits are maximum
What happens when aggregate expenditure are so high that the model predicts an equilibrium level of GDP beyond potential?
the economy experiences demand-pull inflation. nominal GDP will increase but real GDP will not. the economy produces either at potential or just above potential.
C + Ig = GDP is
the formula for aggregate expenditures in a closed economy
The level of investment spending by firms and the investment demand curve are based upon:
the real interest rate
At levels above GDP at equilibrium underspending causes firms:
to reduce production output to move the level of GDP back to equilibrium
The MPC= .7 and government imposes a tax of $10B. Calculate the impact on aggregate expenditures.
Aggregate expenditures fall by $7B.
How is the aggregate expenditures schedule graphically when government introduces a tax?
Aggregate expenditures schedule shifts down by T*MPC.
True or false: Net exports are always positive.
False
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 gap is the amount by which aggregate expenditures at full-employment GDP ____________ those who required to achieve full-employment GDP.
fall short of
When the leakages of savings are less than the injection of investment in the income-expenditure circular flow then:
there will be a below equilibrium level of GDP
What are two ways that equilibrium GDP will change in a private closed economy?
Changes in consumption schedule Changes in investment schedule
What outlets do firms have to sell their output?
Consumer markets Business markets
Net exports are calculated as total ________ minus total _______. ( do not use acronyms)
exports; imports
Currently the country's GDP= .90. If consumption spending increase by $15B, what is the country's new level real GDP?
$650B
In a private closed economy equilibrium GDP is $600B with MPS= .20. When the country begins to trade, exports are $50B and imports are $40B. What is equilibrium GDP for this new private open economy and why?
$650B because net exports are positive.
Keynes proposed what two different policies that a government might pursue to close a recessionary expenditure gab and achieve full employment.
Decrease taxes Increase government spending
Select the statements that best summarize the conditions present during the Great Depression.
Surplus of productive resources Real GDP was significantly below potential output The unemployment rate was at double digits
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 in which components of aggregate of 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
Which of the following is the most fundamental assumption behind the Keynesian aggregate expenditure model?
Prices in the economy are fixed
When the level of GDP is above the equilibrium level, business will respond to the unintended accumulation of unsold goods by:
decreasing the rate of production
A decrease in government spending by $10 billion with a multiplier of 5 will cause aggregate expenditure to:
decline by $50B
It is undesirable for GDP to be greater than the equilibrium level because it will lead to a(n)
decline in output, jobs and total income
If households $30 billion, then the level of real GDP will:
decrease
An increase in lump-sum taxes will:
decrease equilibrium real GDP
When potential output is $510B and the aggregate expenditures curve intersects the 45 degree line above $510B imply that equilibrium real GDP is greater than the potential output, then there in a(n):
inflationary gap and current employment is above full employment
A(n) ______ open economy includes both private and public (government) sectors
mixed
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 dollar depreciates relative to other currencies, it enables people abroad to obtain _________ dollars with each unit of their own currency.
more
A $10 billion change in investment will lead to a $50 billion change in output and income, therefore the:
multiplier is 5
Total tax revenues minus transfer payments is called _____ tax revenues.
net
Exports minus imports is called:
net exports
Suppose country A and country B are trading partners. The imposition of the 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
When the government spends money on goods and services, this affects aggregate expenditures in a public open economy by causing total aggregate expenditures to ________ by the full amount injected into the times the __________ to find the new equilibrium real GDP.
rise; multiplier
In the income-expenditure circular flow, investment is a replacement for the leakage of ___________.
saving
If the economy is at equilibrium real GDP, then:
saving equals planned investment by businesses
The amount spent on imported goods in the U.s must be subtracted from the exported goods spending because:
such spending generates production and income abroad
The difference between an investment schedule and an investment demand curve is:
the investment schedules is the amount of investment forthcoming at each level of GDP. the investment demand curve us based upon and determined by the real rate interest
If the leakage of saving is greater than the injection of investment then:
there will be an above equilibrium level of GDP
It is understandable for actual GDP to be less than the equilibrium because there will be a(n):
unplanned decline in business inventories