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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

Assume that the consumption schedule for a private open economy is such that consumption C = 50 + 0.8Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 30 and Xn = 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig + Xn.

  1. Calculate the equilibrium level of income or real GDP for this economy.

  2. What happens to equilibrium Y if Ig changes to 10? What does this outcome reveal about the size of the multiplier?

If inventories unexpectedly rise, then production _______ sales and firms will respond by _______output.

  1. trails; expanding

  2. trails; reducing

  3. exceeds; expanding

  4. exceeds; reducing

Using the consumption and saving data in problem 1 and assuming investment is \(16 billion, what are saving and planned investment at the \)380 billion level of domestic output? What are saving and actual investment at that level? What are saving and planned investments at the \(300 billion level of domestic output? What are the levels of saving and actual investment? In which direction and by what amount will unplanned investment change as the economy moves from the \)380 billion level of GDP to the equilibrium level of real GDP? From the \(300 billion level of real GDP to the equilibrium level of GDP?

Possible Levels of Employment, Millions

Real Domestic Output (GDP = DI), Billions

Consumption, Billions

Saving, Billions (DI 鈥� C)

40

\)240

\(244

-\)4

45

260

260

0

50

280

276

4

55

300

292

8

60

320

308

12

65

340

324

16

70

360

340

20

75

380

356

24

80

400

372

28

By how much will GDP change if firms increase their investment by $8 billion and the MPC is 0.80? If the MPC is 0.67?

Explain graphically the determination of equilibrium GDP for a private economy through the aggregate expenditures model. Now add government purchases (any amount you choose) to your graph, showing their impact on equilibrium GDP. Finally, add taxation (any amount of lump-sum tax that you choose) to your graph and show its effect on equilibrium GDP. Looking at your graph, determine whether equilibrium GDP has increased, decreased, or stayed the same given the sizes of the government purchases and taxes that you selected.
See all solutions

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