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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

Depict graphically the aggregate expenditures model for a private closed economy. Now show a decrease in the aggregate expenditures schedule and explain why the decline in real GDP in your diagram is greater than the decline in the aggregate expenditures schedule. What term is used for the ratio of a decline in real GDP to the initial drop in aggregate expenditures?

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?

A depression abroad will tend to _______ our exports, which in turn will _______ net exports, which in turn will ______ equilibrium real GDP.

  1. reduce; reduce; reduce

  2. increase; increase; increase

  3. reduce; increase; increase

  4. increase; reduce; reduce

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

Assume that, without taxes, the consumption schedule of an economy is as follows.

GDP, Billions

Consumption, Billions

\(100

\)120

200

200

300

280

400

360

500

440

600

520

700

600

  1. Graph this consumption schedule and determine the MPC.

  2. Assume now that a lumpsum tax is imposed such that the government collects $10 billion in taxes at all levels of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.
See all solutions

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