Question 1

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

Accepted Answer

In the 45-degree line expenditure model, investment (I) is assumed to be autonomous, meaning it does not change with income levels. This makes the C + I line parallel to the C line, as both have the same slope determined by the marginal propensity to consume.

Question 2

A higher price level leads to:

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Question 3

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 4

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

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Question 5

U.S.exports:

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Question 6

Why does the aggregate demand curve slope downward?

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Question 7

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 8

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 9

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 10

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

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Question 11

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

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Question 12

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

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Question 13

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

Accepted Answer

In a simple economy, there are no leakages like taxes, imports, or saving, and injections such as government expenditure, exports, and investment. Therefore, saving equals planned investment in equilibrium because whatever income is generated is either spent or saved. Planned investment refers to firms' planned spending on capital goods, which is determined by their expected return on investment. Thus, in equilibrium, saving in the economy must equal firms' planned investment spending.

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 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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Question 16

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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Quiz 26: Demand-Side Equilibrium: Unemployment or Inflation