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Chapter 11: Q8. (page 236)

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

Short Answer

Expert verified

Option (c):a recessionary; $20 billion

Step by step solution

01

Step 1. Meaning of expenditure gap

The expenditure gap arises when there is a difference in the equilibrium level of GDP and full employment GDP. The equilibrium GDP is the actual income or output of the economy. Full employment GDP means the output that could have been produced if the resources were utilized efficiently.

The difference between the two can result in an inflationary( actual GDP>Potential GDP) or a recessionary gap (Potential GDP>actual GDP).

02

Step 2. Explanation for the correct option

A recessionary expenditure gap occurs when the equilibrium GDP or actual GDP falls short of reaching the point of full employment GDP. The GDP produced is below the potential capacity production of the economy. In such a case, the economy faces the loss of potential GDP.

Here, the equilibrium GDP is less than the potential or full employment GDP. Therefore, the economy experiences a recessionary gap. The difference between the potential GDP and equilibrium GDP is $20 billion (= $800 - $780). Thus, the magnitude of the recessionary gap is $20 billion.

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Most popular questions from this chapter

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?

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?

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

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

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.
See all solutions

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