Chapter 11: Q1. (page 236)
True or False. The aggregate expenditures model assumes flexible prices.
The statement is false.
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What is Say’s 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’s view on this matter.
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 |
Graph this consumption schedule and determine the MPC.
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.
Refer to the accompanying table in answering the questions that follow:
(1) Possible Levels of Employment, Millions | (2) Real Domestic Output, Millions | (3) Aggregate Expenditures (Ca + Ig+ Xn+ G), Millions |
90 | \(500 | \)520 |
100 | 550 | 560 |
110 | 600 | 600 |
120 | 650 | 640 |
130 | 700 | 680 |
If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary expenditure gap or the recessionary expenditure gap? What is the multiplier in this example?
Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full employment level of output is $500 billion? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? What is the multiplier in this example?
Assuming that investment, net exports, and government expenditures do not change with changes in real GDP, what are the values of the MPC, the MPS, and the multiplier?
The economy’s 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 ___________.
an inflationary; \(5 billion
an inflationary; \)10 billion
an inflationary; \(20 billion
a recessionary; \)5 billion
a recessionary; \(10 billion
a recessionary; \)20 billion
If total spending is just sufficient to purchase an economy’s output, then the economy is
in equilibrium.
in recession.
in debt.
in expansion.
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