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Chapter 11: Q10. (page 238)

Answer the following questions, which relate to the aggregate expenditures model:

  1. If Ca is \(100, Ig is \)50, Xn is 鈭抃(10, and G is \)30, what is the economy鈥檚 equilibrium GDP?

  2. If real GDP in an economy is currently \(200, Ca is \)100, Ig is \(50, Xn is 鈭抃)10, and G is \(30, will the economy鈥檚 real GDP rise, fall, or stay the same?

  3. Suppose that full-employment (and full-capacity) output in an economy is \)200. If Ca is \(150, Ig is \)50, Xn is 鈭抃(10, and G is \)30, what will be the macroeconomic result?

Short Answer

Expert verified

  1. The economy鈥檚 equilibrium GDP is $170.

  2. The economy鈥檚 real GDP will fall.

  3. There will be an inflationary expenditure gap in the economy.

Step by step solution

01

Step 1. Explanation for part (a)

The equation for equilibrium GDP is Y = Ca + Ig + Xn + G

Placing the respective values in the equilibrium equation as follows:

Y = $100 + $50 - $10 + $30

Y = $170

Therefore, the economy鈥檚 equilibrium GDP is $170.

02

Step 2. Explanation for part (b)

Ca = $100

Ig = $50

Xn = -$10

G = $30

Placing the values of expenditure components in the equilibrium equation:

Total Spending = $100 + $50 - $10 + $30

Total Spending = $170

The real GDP in the economy is $200, and the total spending is $170.

Since the real GDP is greater than the total spending GDP, the output or the real GDP will decline until the economy reaches an equilibrium.

03

Step 3. Explanation for part (c)

Ca = $150

Ig = $50

Xn = -$10

G = $30

Placing the values in the equation for equilibrium condition:

Y = $150 + $50 - $10 + 30

Y = $220

The full employment income is $200, the actual GDP ($220) is more than the potential GDP. It will cause an inflationary expenditure gap which can be reduced by slowing down or reducing production.

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Most popular questions from this chapter

Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in a private closed economy?

  1. A decline in the real interest rate.

  2. An overall decrease in the expected rate of return on investment.

  3. A sizable, sustained increase in stock prices.

Why is saving called a leakage? Why is a planned investment called an injection? Why must saving equal planned investment at equilibrium GDP in a private closed economy? Are unplanned changes in inventories rising, falling, or constant at equilibrium GDP? Explain.

Assuming the level of investment is \(16 billion and independent of the level of total output, complete the following table and determine the equilibrium levels of output and employment in this private closed economy. What are the values of the MPC and MPS?

Possible Levels of Employment, Millions
Real Domestic Output (GDP = DI), Billions
Consumption, Billions
Saving, Billions
40\)240$244
45260260
50280276
55300292
60320308
65340324
70360340
75380356
80400372

What is an investment schedule, and how does it differ from an investment demand curve?

Refer to the accompanying table in answering the questions that follow:

(1) Possible Levels of Employment, Millions

(2) Real Domestic Output, Millions

(3) Aggregate Expenditures (Ca + Ig+ Xn+ G), Millions

90

\(500

\)520

100

550

560

110

600

600

120

650

640

130

700

680

  1. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary expenditure gap or the recessionary expenditure gap? What is the multiplier in this example?

  2. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full employment level of output is $500 billion? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? What is the multiplier in this example?

  3. Assuming that investment, net exports, and government expenditures do not change with changes in real GDP, what are the values of the MPC, the MPS, and the multiplier?
See all solutions

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