Deck 11: The Aggregate Expenditures Model

Question 1

Explain why saving equals planned investment at equilibrium GDP.

Answer 1

It is based on the fact that saving is income not consumed.Saving therefore represents a "leakage" or diversion of potential spending from the income-expenditures stream.Consumption falls short of total output by the amount of saving.However,investment spending can be viewed as an "injection" into this income-expenditures stream.If planned investment is equal to the amount of saving at a particular level of GDP,then leakages equal injections and GDP will be in equilibrium.

Question 2

What are two components of aggregate expenditures in a closed private economy?

Answer 2

Consumption and investment are the only two components in a closed private economy.

Question 3

What differentiates the planned equilibrium level of investment from disequilibrium levels of investment? Explain.

Answer 3

Planned investment differs from unplanned investment by the changes in inventories.If inventories exceed the planned level,then producers will want to reduce output.If inventories are less than the planned level,then producers will want to expand output.Only when inventories are at the planned level will there be an equilibrium level of GDP.

Question 4

The aggregate expenditures model has one over-arching assumption.What is this assumption?

Question 5

Explain why exports are added to,and imports are subtracted from,aggregate expenditures in moving from a closed to an open economy.

Question 6

Evaluate the statement that "for an open economy the equilibrium GDP always corresponds with an equality of exports and imports."

Question 7

In a graph relating private spending (C + I_g)to real gross domestic product (GDP),what does the 45-degree line represent?

Question 8

Explain the difference between planned and actual investment in the economy.Why is the distinction important?

Question 9

What is the difference between the investment-demand curve and the investment schedule for the economy?

Question 10

Use the graph below to explain the determination of equilibrium GDP by the aggregate expenditures-domestic output approach.At equilibrium C + I_g = Real GDP ($550 + $50 = $600).Why does the intersection of the aggregate expenditures schedule and the 45-degree line determine the equilibrium GDP?

Question 11

Explain the difference between an equilibrium level of GDP and a level of GDP that is in disequilibrium.

Question 12

Whenever there is a shift in the investment schedule and/or the consumption-saving schedules,there will be a new equilibrium level of GDP.Explain why this is so.

Question 13

Define the equilibrium level of output.

Question 14

Whenever there is an upshift or downshift in aggregate expenditures due to a change in one of its non-income determinants,the equilibrium GDP changes by a multiple of the initial change in spending.Explain this multiplier effect.

Question 15

What is the effect of net exports,either positive or negative,on equilibrium GDP?

Question 16

What is the relationship between actual investment,planned investment,and saving in an economy? What conditions among these concepts produce equilibrium?

Question 17

In addition to stuck prices,what are the two simplifying assumptions of the initial model in this chapter? What are two implications from these simplifications?

Question 18

If prices are stuck,how can firms receive feedback from the market to tell them how much to produce?

Question 19

Other things being constant,what will be the effect of each of the following upon the equilibrium level of GDP?
(a)An increase in the amount of liquid assets consumers are holding;
(b)A sharp rise in stock prices;
(c)A rapid upsurge in the rate of technological advance;and
(d)A sharp increase in the interest rate.

Question 20

How does the fact that imports vary directly with GDP affect the stability of the domestic economy?

Question 21

Keynes developed his theory during the height of the Great Depression (a severe recessionary gap)in the 1930s.What two policy tools did he recommend to close this gap?

Question 22

"If taxes and government spending are increased by the same amount,there will still be a positive effect on equilibrium GDP." Explain.

Question 23

Assume that investment,net exports,government expenditures,and taxes do not change with changes in real GDP and the MPC is .75.
(a)Suppose government spending increases by $20 billion.What is the impact on real GDP?
(b)Suppose that instead lump-sum taxes increase by $20 billion.What is the impact on real GDP?
(c)How would the results in (a)and (b)be different if imports and taxes increase as real GDP increases?

Question 24

Explain why are nations are tempted to use policies of imposing tariffs on imported goods,and devaluating their national currency? Further explain why implementing such policies are huge mistakes?

Question 25

Explain the effect of an increase in government spending of $50 billion on the economy.Assume that investment,net exports,government expenditures,and taxes do not change with changes in real GDP and the MPC is .75.

Question 26

What is the difference between the multiplier in a closed private economy and the multiplier in a mixed open economy?

Question 27

At the current level of real GDP,
S_a = $180
I_g = $160
X = $300
M = $280
G = $250
T = $270
(a)What is the size of injections? Leakages?
(b)Is GDP at its equilibrium level? Explain.
(c)What is the unplanned change in inventories? Explain.

Question 28

Explain the effect of a cut in lump-sum taxes of $40 billion on the economy.Assume that investment,net exports,government expenditures,and taxes do not change with changes in real GDP and the MPC is .75.How does the impact of this change differ from that of a $40 billion increase in government spending?

Question 29

Why does the inclusion of a lump-sum tax cause domestic consumption to fall initially by an amount less than the tax?

Question 30

When international trade is considered,explain how net exports could be either positive or negative additions to aggregate expenditures.In which case would the impact of net exports be expansionary? Explain.

Question 31

Assume the level of investment is $8 billion and independent of the level of total output.Complete the following table and answer the following questions about this private closed economy.

Question 32

If there is a recessionary gap of $100 billion and the MPC is 0.8,by how much must taxes be reduced to eliminate the recessionary gap? Assume that prices are stuck and that investment,net exports,government expenditures,and taxes do not change with changes in real GDP.

Question 33

At the current level of real GDP,
S_a = $160
I_g = $180
X = $320
M = $280
G = $270
T = $240
(a)What is the size of injections? Leakages?
(b)Is GDP at its equilibrium level? Explain.
(c)What is the unplanned change in inventories? Explain.

Question 34

Describe the impact of an increase in government spending assuming no change in taxes and less than full-employment output.

Question 35

Compare and contrast the recessionary gap and the inflationary gap.

Question 36

Some critics of the Chinese government accuse it of "manipulating" its currency,the Chinese yuan.Explain the nature of and the effects of this "manipulation".

Question 37

The data in the first two columns below are for a closed economy without government.Use this table to answer the following questions.

Question 38

Explain the relationship between net exports and the following factors: prosperity abroad,tariffs on Canadian exports abroad,depreciation of the Canadian dollar on foreign exchange markets.

Question 39

Explain how the recession resulting from the financial crisis in the United States in late-2008 was transmitted to Canada.

Question 40

The data in the first two columns below are for a closed economy without government.Use this table to answer the following questions.

Question 41

Use the table below to answer the following questions.Assume that investment,net exports,government expenditures,and taxes do not change with changes in real GDP.

Question 42

Answer the following questions using the aggregate expenditures model of the economy described below.
C = 90 + .7Y_d
T = 50 + .2Y
I_a = 36
G_a = 45
X_a = 62
M = .16Y
(a)What are the marginal propensity to consume,the marginal tax rate,and the marginal propensity to import?
(b)What is the saving function? What is the marginal propensity to save?
(c)What is the aggregate expenditure function? What is autonomous expenditure? What is the marginal propensity to withdraw?
(d)What is the equilibrium level of real GDP?
(e)What is the size of the multiplier?
(f)Suppose the full employment level of real GDP is $350.Does a recessionary gap or an inflationary gap exist? How can the government eliminate the gap by altering government expenditures?

Question 43

Use the table below to answer the following questions.Assume that investment,net exports,government expenditures,and taxes do not change with changes in real GDP.

Question 44

Answer the following questions using the aggregate expenditures model of the economy described below.
C = 80 + .6Y_d
T = 40 + .2Y
I_a = 28
G_a = 64
X_a = 76
M = .18Y
(a)What are the marginal propensity to consume,the marginal tax rate,and the marginal propensity to import?
(b)What is the saving function? What is the marginal propensity to save?
(c)What is the aggregate expenditure function? What is autonomous expenditure? What is the marginal propensity to withdraw?
(d)What is the equilibrium level of real GDP?
(e)What is the size of the multiplier?
(f)Suppose the full employment level of real GDP is $340.Does a recessionary gap or an inflationary gap exist? How can the government eliminate the gap by altering government expenditures?

Question 45

Refer to the following table to answer the questions.

Question 46

Assume the level of investment is $12 billion and independent of the level of total output.Complete the following table and answer the following questions about this private closed economy.

Question 47

Answer the following questions using the aggregate expenditures model of the economy described below.
C = 100 + .8Y_d
T = 60 + .25Y
I_a = 28
G_a = 48
X_a = 54
M = .1Y
(a)What are the marginal propensity to consume,the marginal tax rate,and the marginal propensity to import?
(b)What is the saving function? What is the marginal propensity to save?
(c)What is the aggregate expenditure function? What is autonomous expenditure? What is the marginal propensity to withdraw?
(d)What is the equilibrium level of real GDP?
(e)What is the size of the multiplier?
(f)Suppose the full employment level of real GDP is $380.Does a recessionary gap or an inflationary gap exist? How can the government eliminate the gap by altering government expenditures?