Question 1

The aggregate expenditure model focuses on the short-run relationship between ________ and ________.

Accepted Answer

The aggregate expenditure model focuses on the short-run relationship between real spending (expenditures by households, businesses, governments, and foreigners) and real GDP (the total output of goods and services produced in the economy). The model suggests that changes in spending will lead to corresponding changes in output in the short run, with the size of the effect depending on the economy's level of spare capacity.

Question 2

Actual investment spending includes spending by consumers on

Accepted Answer

Actual investment spending refers to the purchase of new capital goods, such as buildings, machinery, and equipment. Therefore, the most accurate choice would be C, which includes new houses. Choices A, B, and D refer to consumption spending, and choice E refers to financial investing.

Question 3

If firms find that consumers are purchasing less than expected, which of the following would you expect?

Accepted Answer

If consumers are purchasing less than expected, it indicates a decrease in aggregate demand, which would lead to a decrease in aggregate expenditure. This would cause GDP to be less than aggregate expenditure, since GDP includes all final goods and services produced within a country, while aggregate expenditure includes all spending on those goods and services (including imports). The economy would then adjust to macroeconomic equilibrium as inventories rise and production and employment fall to match the lower level of demand. Since production and employment are falling, the unemployment rate would likely rise, not fall.

Question 4

If firms sell what they expected to sell, which of the following will be true?

Accepted Answer

If firms sell what they expected to sell, there will be no unplanned change in inventories. This means that the goods produced will have been sold, and there won't be any excess inventory to store or sell later. Therefore, firms will have met their planned sales, and there won't be any inventory buildup or reduction.

Question 5

If economists forecast an increase in aggregate expenditure, which of the following is likely to occur?

Accepted Answer

An increase in aggregate expenditure implies an increase in demand for goods and services, leading to an increase in production and GDP. Choice B, C, D, and E are all unlikely to occur with an increase in aggregate expenditure.

Question 6

In a small economy in 2016, aggregate expenditure was $850 million while GDP that year was $800 million.Which of the following can explain the difference between aggregate expenditure and GDP that year?

Accepted Answer

When aggregate expenditure exceeds GDP, it indicates that firms invested less in inventories than anticipated, leading to a reduction in inventory levels.

Question 7

Firms in a small economy anticipated that inventories would grow over the past year by $750,000, and over that year, inventories grew by exactly $750,000.This implies that

Accepted Answer

If firms anticipated that inventories would grow by $750,000 and inventories actually grew by exactly $750,000, it means that there was no unplanned increase or decrease in inventories. Therefore, the aggregate expenditure (which includes consumption, investment, government spending, and net exports) must have been equal to GDP, as the changes in inventories are included in GDP calculations.

Question 8

If planned investment is equal to actual investment, then aggregate expenditure is equal to GDP.

Accepted Answer

Planned investment refers to the amount of investment that businesses plan to make, while actual investment is the amount they actually invest. If these two values are equal, it means that businesses are carrying out their investment plans as intended. Aggregate expenditure is the total spending in the economy, which includes consumption, investment, government spending, and net exports. Since investment is a component of aggregate expenditure, if planned investment is equal to actual investment, then aggregate expenditure will be equal to GDP (which is the total value of goods and services produced in the economy).

Question 9

Goods that have been produced but not yet sold are referred to as

Accepted Answer

Goods that have been produced but not yet sold are referred to as inventories.

Question 10

Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is aggregate expenditure?

Accepted Answer

Aggregate expenditure is the sum of consumption spending, planned investment spending, unplanned investment spending, government purchases, and net export spending. 
Therefore, 
Aggregate expenditure = Consumption spending + Planned investment spending + Unplanned investment spending + Government purchases + Net export spending
= $5 million + $8 million + $2 million + $10 million + $2 million
= $25 million

Question 11

If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic equilibrium?

Accepted Answer

When aggregate expenditure is greater than GDP, it indicates that the demand for goods and services is higher than what the economy is currently producing. This leads to a decrease in inventories as firms sell more than they produce. To replenish their inventories, firms increase production, which leads to higher GDP and employment.

Question 12

Firms in a small economy anticipated that inventories would grow over the past year by $500,000.Over that year, inventories actually grew by only $400,000.This implies that

Accepted Answer

When inventories grow by less than anticipated, it implies that actual sales were higher than expected, meaning aggregate expenditure was greater than what firms planned for, which typically means it was greater than GDP.

Question 13

Consumption spending is $5 million, planned investment spending is $8 million, actual investment spending is $8 million, government purchases are $10 million, and net export spending is $2 million. Based on this information, which of the following is true?

Accepted Answer

GDP is equal to aggregate expenditure, which is calculated as the sum of consumption spending, planned investment spending, government purchases, and net export spending. Adding up the numbers given:

Aggregate expenditure = consumption spending + planned investment spending + government purchases + net export spending
= $5 million + $8 million + $10 million + $2 million
= $25 million

Since this is equal to GDP, option B is correct. Options A, C, D, and E are not supported by the given information.

Question 14

Macroeconomic equilibrium occurs when

Accepted Answer

Macroeconomic equilibrium occurs when aggregate expenditure equals GDP, meaning the total spending in the economy (consumption, investment, government spending, and net exports) matches the total output or production of goods and services.

Question 15

When aggregate expenditure is less than GDP, which of the following is true?

Accepted Answer

When aggregate expenditure is less than GDP, it means that households and firms are not consuming and investing as much as expected in the economy. This leads to unsold goods and services, resulting in unplanned inventory accumulation. Thus, choice A is the correct answer. Choices B, C, and D are not necessarily true when aggregate expenditure is less than GDP.

Question 16

An unplanned decrease in inventories results in

Accepted Answer

An unplanned decrease in inventories means that actual sales were higher than expected, leading to actual investment being less than planned investment.

Question 17

Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is -$2 million, government purchases are $10 million, and net export spending is $2 million. What is GDP?

Accepted Answer

The answer of Consumption spending is $5 million, planned investment...

Question 18

At macroeconomic equilibrium, total ________ equals total ________.

Accepted Answer

At macroeconomic equilibrium, total spending equals total production since all goods and services produced must be purchased by someone. Consumption, investment, and government spending all contribute to total spending, while production is the total value of all goods and services produced in the economy. Invested funds may also help with production, but in this scenario, investment doesn't equal total production. Taxes and transfers affect spending and income distribution, but they are not equal to total production. Similarly, spending and savings are both important components of total spending, but savings alone do not equal production.

Question 19

Which of the following is not a component of aggregate expenditure?

Accepted Answer

Actual investment spending is not a component of aggregate expenditure, as it refers to the actual amount spent on investment rather than the planned or expected amount. The other options listed are all components of aggregate expenditure, which is the total amount spent in an economy on consumption, investment, government purchases, and net exports.

Question 20

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million.If GDP during the same time period is equal to $23 million, what unplanned changes in inventories occurred?

Accepted Answer

We can use the equation for GDP: GDP = Consumption + Planned Investment + Government purchases + Net exports + Unplanned changes in inventories
Substituting the given values, we get:
$23 million = $5 million + $8 million + $10 million + $2 million + Unplanned changes in inventories
Simplifying, we get:
Unplanned changes in inventories = $23 million - ($5 million + $8 million + $10 million + $2 million)
Unplanned changes in inventories = $-2 million
This negative value indicates that there was an unplanned decrease in inventories. Therefore, choice C is the correct answer.

Quiz 8: Aggregate Expenditure and Output in the Short Run

The aggregate expenditure model focuses on the short-run relationship between and .