Question 1

Define the terms recessionary gap and inflationary gap. Why do they occur?

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Question 2

Describe the role of business inventory change in determining the equilibrium level of GDP and changes in the level of GDP.

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Question 3

Suppose the economy is suffering in a recessionary period. Firms are facing increasing inventories and individual consumers are increasing their saving to prepare for hard times ahead. What is likely to happen to the economy and can it correct itself and grow toward full employment in the short run?

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Question 4

U.S. exports

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...

Question 5

Why does the aggregate demand curve slope downward?

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Question 6

A higher price level leads to

Accepted Answer

A higher price level leads to a decrease in purchasing power, which reduces the real wealth of individuals.

Question 7

For a simple economy (no government, no foreign sector), the condition for equilibrium can be stated correctly as

Accepted Answer

In a simple economy with no government and no foreign sector, the only two components of GDP are consumption and investment. Saving is defined as income not spent on consumption, so it is equal to investment in a closed economy. However, the investment can either be actual (what is really being invested) or planned (what firms intend to invest). Since firms can sometimes end up with unintended inventory accumulation, saving must equal planned investment for the economy to be in equilibrium.

Question 8

In the standard 45° line expenditure model, the C + I line and the C line are parallel because

Accepted Answer

In the 45° line expenditure model, the C + I line and the C line are parallel because all investment (I) is assumed to be autonomous, meaning it does not change with changes in income or output levels. This assumption keeps the C + I line parallel to the C line, with the vertical distance between them representing the constant level of autonomous investment.

Question 9

Why do booms and recessions tend to be transmitted across national borders?

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Question 10

Differentiate between an induced increase in consumption and an autonomous increase in consumption. How are they represented on a graph?

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Question 11

Carefully define the following terms and explain their importance in the study of macroeconomics: 
a. Expenditure schedule 
b. Saving schedule 
c. Equilibrium GDP 
d. Leakages schedule 
e. Injections schedule

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Question 12

What is meant by the concept of a "coordination failure" in macroeconomics?

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Question 13

What is a multiplier? How does the multiplier effect occur?

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Question 14

Where does equilibrium occur in an income expenditure diagram? What would be the effect if production is at either on the left or right side of the equilibrium point?

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Question 15

The total expenditure schedule in Macroland begins with these initial levels (in billions of dollars): Income = 1,000; Consumption = 900; Investment = 200; Government = 300; Net Exports = −100. If the MPC = 0.75 and income increases in increments of 200, find the equilibrium level of income. If full employment requires an income level of 2,000, what (if anything) should the government do? Indicate both the direction of the spending change and the size of the spending change.

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Question 16

The expenditure schedule and the aggregate demand curve show much the same thing, with one crucial difference-the price level. How does the price level affect the two schedules?

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Quiz 25: Demand-Side Equilibrium: Unemployment or Inflation