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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

The data in columns 1 and 2 in the table below are for a private closed economy.

  1. Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy.

  2. Now open up this economy to international trade by including the export and import figures of columns 3 and 4. Fill in columns 5 and 6 and determine the equilibrium GDP for the open economy. What is the change in equilibrium GDP caused by the addition of net exports?

  3. Given the original \(20 billion level of exports, what would be net exports and the equilibrium GDP if imports were \)10 billion greater at each level of GDP?

  4. What is the multiplier in this example?

(1) Real Domestic Output (GDP = DI), Billions

(2) Aggregate Expenditures, Private Closed Economy, Billions

(3) Exports, Billions

(4) Imports, Billions

(5) Net Exports, Billions

(6) Aggregate Expenditures, Private Open Economy, Billions

\(200

\)240

\(20

\)30



250

280

20

30



300

320

20

30



350

360

20

30



400

400

20

30



450

440

20

30



500

480

20

30



550

520

20

30

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.

The economy鈥檚 current level of equilibrium GDP is \(780 billion. The full-employment level of GDP is \)800 billion. The multiplier is 4. Given those facts, we know that the economy faces _______ expenditure gap of ___________.

  1. an inflationary; \(5 billion

  2. an inflationary; \)10 billion

  3. an inflationary; \(20 billion

  4. a recessionary; \)5 billion

  5. a recessionary; \(10 billion

  6. a recessionary; \)20 billion

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

What is a recessionary expenditure gap? An inflationary expenditure gap? Which is associated with a positive GDP gap? A negative GDP gap?
See all solutions

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