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