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Chapter 11: Q3. (page 236)

True or False. If spending exceeds output, real GDP will decline as firms cut back on production.

Short Answer

Expert verified

The statement is false.

Step by step solution

01

Step 1. Difference between the real GDP and spending

Real GDP estimates the production of output compared to the base year production at the then price level. It sees the growth of an economy in terms of the output produced rather than the hike in prices.

On the other hand, spending measures the growth of expenditure components in monetary terms. An economy鈥檚 spending can change by change in prices or output or both.

02

Step 2. Reason for the correct statement

When spending exceeds output, it means that the economy is not in equilibrium. There is pressure on the prices (inflation as demand is greater than production). The firms will try to take advantage of this and will increase the supply. Therefore, to bring the economy in equilibrium, firms will try to minimize the size of inventory goods and increase their production.

Therefore, the real GDP will increase because firms expand their output to reach an equilibrium state where spending is equal to output. There is no pressure on the pries.

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Most popular questions from this chapter

What is Say鈥檚 law? How does it relate to the view held by classical economists that the economy generally will operate at a position on its production possibilities curve (Chapter 1)? Use production possibilities analysis to demonstrate Keynes鈥檚 view on this matter.

Suppose that a certain country has an MPC of 0.9 and a real GDP of \(400 billion. If its investment spending decreases by \)4 billion, what will be its new level of real GDP?

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

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?

Question: If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by _______ taxes or _______ government expenditures.

  1. increasing; increasing

  2. increasing; decreasing

  3. decreasing; increasing

  4. decreasing; decreasing
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