Chapter 11: The Aggregate Expenditures Model

The investment __________ shows the amount of investment forthcoming at each level of GDP.

schedule

__________ are included as part of U.S. GDP because they create jobs and income when purchased by foreigners.

Exports

True or false: Equilibrium GDP always occurs at the full-employment GDP.

False

The net export schedule lists the amount of net exports that will occur at each level of

GDP

True or false: Actual investment equals savings at all GDP levels.

True

When there is overproduction of goods leading to output levels above equilibrium GDP, this results in:

a piling up of unsold goods and a cutback in production rates

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

The aggregate expenditure schedule in a private closed economy is the sum of __________ plus planned __________.

consumption; investment

The formula for aggregate expenditures in an open mixed economy is __________+__________+__________+__________=GDP.

consumption; investment; government purchases; net exports

When GDP is above equilibrium, firms will __________ the rate of production.

cut

An inflationary gap is the amount by which aggregate expenditures at the full-employment GDP:

exceed those required to achieve full-employment GDP

Net exports are calculated as total __________ minus total __________.

exports; imports

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 fundamental assumption behind Keynesian aggregate expenditures model is that prices in the economy are:

fixed

The two components of aggregate expenditures in a private closed economy are consumption and gross private __________.

investment

Saving is a __________ or withdrawal of spending from the economy's circular flow of income and expenditures.

leakage

Total tax revenues minus transfer payments is called government's __________ tax revenues.

net

To avoid overstating the value of domestic production, the amount spent on important goods in the U.S. must be subtracted from exports or total spending because __________.

such spending generates production a and income abroad

It is undesirable for actual GDP to be less than the equilibrium level because there will be an:

unplanned decline in business inventories

Which of the following will result from the depreciation of the US dollar relative to other currencies?

(1) A decrease in the price, in terms of the other currencies, of US goods (2) An increase in US net exports

Keynes proposed what two different policies that a government might pursue to close a recessionary expenditure gap and achieve full employment?

(1) Decrease taxes (2) Increase government spending

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?

(1) The economy is likely to produce either at potential or just above potential output (2) The economy is likely to experience demand-pull inflation (3) Nominal GDP is likely to increase, but real GDP is not likely to increase

Which of the following statements are true of investment schedule and investment demand curve?

(1) The investment demand curve is based upon and determined b the real rate of interest. (2) The investment schedule is the amount of investment forthcoming at each level of GDP.

Equilibrium GDP is the desirable level of output for which of the following reasons?

(1) The total quantity of goods produced equals the total quantity of goods purchased (2) There is no increase in inventories of goods (3) There is no excess of total spending

What are the two ways that equilibrium GDP will change in a private closed economy?

(1) changes in investment schedule (2) changes in consumption schedule

Although an economy may be at equilibrium GDP on the aggregate expenditures model, this does not mean that the economy is also at

(1) full-employment (2) long-run (3) potential

During the 2007-2009 recession, which components of aggregate expenditures were significant contributors to the downturn?

(1) planned investment spending (2) consumption spending

In a closed economy, two characteristics of equilibrium GDP are:

(1) savings and planned investment are equal (2) there are no unplanned changes in inventories

__________ is an injection into the income-expenditure circular flow in a private closed economy.

Investment

GDP __________ is the desired level of output because total spending is just sufficient to purchase total output.

at equilibrium

When the dollar __________ relative to other currencies it enables people abroad to obtain more dollars with each unit of their own currency.

depreciates

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 private closed economy is one without international trade or __________ spending.

government

A private open economy is a private economy that includes international trade but not __________ 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 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.

lower

A tax that yields the same amount of tax revenue at each level of GDP regardless of the level of government purchases is called a __________ tax.

lump-sum

A __________ economy includes both private and public (government) sectors.

mixed

An economy that includes consumption spending, investment spending, government spending, taxes and international trade is called a:

mixed economy

The amounts that businesses firms collectively intend to invest at each level of GDP is called their:

planned investment

When exports are greater than imports, net exports will be:

positive

The level of investment spending by firms is based upon the current __________ interest rate together with the investment __________ curve.

real; demand

In the income-expenditure circular flow, investment is a replacement for the leakage of __________.

saving

When government imposes a lump-sum tax on its citizens, this has the effect of decreasing equilibrium real GDP by reducing both consumption and __________.

savings

If the rate of return of a firm's potential project or the real interest rate increases or decreases, the size of the effect they will have on the equilibrium GDP is based on:

the multiplier

The level of investment spending by firms and the investment demand curve are based upon:

the real interest rate

The multiplier effect means that:

there is a bigger chance in equilibrium GDP than the change in aggregate expenditures

Exports are included as a component of US aggregate expenditures because:

these are goods and services that created income in the US