Chapter 11: Q4. (page 236)
If inventories unexpectedly rise, then production _______ sales and firms will respond by _______output.
trails; expanding
trails; reducing
exceeds; expanding
exceeds; reducing
Option (d) exceeds; reducing
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Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in a private closed economy?
A decline in the real interest rate.
An overall decrease in the expected rate of return on investment.
A sizable, sustained increase in stock prices.
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
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 \(300 billion level of real GDP to the equilibrium level of GDP?
Possible Levels of Employment, Millions | Real Domestic Output (GDP = DI), Billions | Consumption, Billions | Saving, Billions (DI – C) |
40 | \)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 |
Refer to columns 1 and 6 in the table for problem 5. Incorporate government into the table by assuming that it plans to tax and spend \(20 billion at each possible level of GDP. Also, assume that the tax is a personal tax and that government spending does not induce a shift in the private aggregate expenditures schedule. What is the change in equilibrium GDP caused by the addition of government?
(1) Real Domestic Output (GDP = DI), Billions | (2) Aggregate Expenditures, Private Closed Economy, Billions | (3) Exports, Billions | (4) Imports, Billions | (5) Net Exports, Billions | (6) Aggregate Expenditures, Private Open Economy, Billions |
\)200 | \(240 | \)20 | \(30 | -\)10 | $230 |
250 | 280 | 20 | 30 | -10 | 270 |
300 | 320 | 20 | 30 | -10 | 310 |
350 | 360 | 20 | 30 | -10 | 350 |
400 | 400 | 20 | 30 | -10 | 390 |
450 | 440 | 20 | 30 | -10 | 430 |
500 | 480 | 20 | 30 | -10 | 470 |
550 | 520 | 20 | 30 | -10 | 510 |
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.
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