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Exam 11: Part A: The Aggregate Expenditures Model

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What differentiates the planned equilibrium level of investment from disequilibrium levels of investment? Explain.

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Planned investment differs from unplanne...

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Explain why saving equals planned investment at equilibrium GDP.

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It is based on the fact that saving is i...

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Explain how the recession resulting from the financial crisis in the United States in late-2008 was transmitted to Canada.

Answer the following questions using the aggregate expenditures model of the economy described below.C = 90 + .7Yd T = 50 + .2Y Ia = 36 Ga = 45 Xa = 62 M = .16Y (a) What are the marginal propensity to consume, the marginal tax rate, and the marginal propensity to import? (b) What is the saving function? What is the marginal propensity to save? (c) What is the aggregate expenditure function? What is autonomous expenditure? What is the marginal propensity to withdraw? (d) What is the equilibrium level of real GDP? (e) What is the size of the multiplier? (f) Suppose the full employment level of real GDP is $350.Does a recessionary gap or an inflationary gap exist? How can the government eliminate the gap by altering government expenditures?

"If taxes and government spending are increased by the same amount, there will still be a positive effect on equilibrium GDP." Explain.

Explain the effect of an increase in government spending of $50 billion on the economy.Assume that investment, net exports, government expenditures, and taxes do not change with changes in real GDP and the MPC is .75.

The aggregate expenditures model has one over-arching assumption.What is this assumption?

Explain the effect of a cut in lump-sum taxes of $40 billion on the economy.Assume that investment, net exports, government expenditures, and taxes do not change with changes in real GDP and the MPC is .75.How does the impact of this change differ from that of a $40 billion increase in government spending?

What is the difference between the multiplier in a closed private economy and the multiplier in a mixed open economy?

Assume that investment, net exports, government expenditures, and taxes do not change with changes in real GDP and the MPC is .75.(a) Suppose government spending increases by $20 billion.What is the impact on real GDP? (b) Suppose that instead lump-sum taxes increase by $20 billion.What is the impact on real GDP? (c) How would the results in (a) and (b) be different if imports and taxes increase as real GDP increases?

When international trade is considered, explain how net exports could be either positive or negative additions to aggregate expenditures.In which case would the impact of net exports be expansionary? Explain.

Explain the relationship between net exports and the following factors: prosperity abroad, tariffs on Canadian exports abroad, depreciation of the Canadian dollar on foreign exchange markets.

Whenever there is an upshift or downshift in aggregate expenditures due to a change in one of its non-income determinants, the equilibrium GDP changes by a multiple of the initial change in spending.Explain this multiplier effect.

What is the relationship between actual investment, planned investment, and saving in an economy? What conditions among these concepts produce equilibrium?

Answer the following questions using the aggregate expenditures model of the economy described below.C = 100 + .8Yd T = 60 + .25Y Ia = 28 Ga = 48 Xa = 54 M = .1Y (a) What are the marginal propensity to consume, the marginal tax rate, and the marginal propensity to import? (b) What is the saving function? What is the marginal propensity to save? (c) What is the aggregate expenditure function? What is autonomous expenditure? What is the marginal propensity to withdraw? (d) What is the equilibrium level of real GDP? (e) What is the size of the multiplier? (f) Suppose the full employment level of real GDP is $380.Does a recessionary gap or an inflationary gap exist? How can the government eliminate the gap by altering government expenditures?

Evaluate the statement that "for an open economy the equilibrium GDP always corresponds with an equality of exports and imports."

Explain the difference between planned and actual investment in the economy.Why is the distinction important?

How does the fact that imports vary directly with GDP affect the stability of the domestic economy?

At the current level of real GDP, Sa = $180 Ig = $160 X = $300 M = $280 G = $250 T = $270 (a) What is the size of injections? Leakages? (b) Is GDP at its equilibrium level? Explain.(c) What is the unplanned change in inventories? Explain.

Use the table below to answer the following questions.Assume that investment, net exports, government expenditures, and taxes do not change with changes in real GDP. (a) What is the size of the multiplier in this economy? (b) If taxes are zero, government expenditures are $10, investment is $6, and net exports are zero, what is the equilibrium GDP? (c) If taxes are $5, government expenditures are $10, investment is $6, and net exports are zero, what is the equilibrium GDP? (d) Assume investment is $50, taxes are $50, net exports and government expenditures are each zero.The full-employment level of real GDP is $340.How much of a reduction in taxes is needed to eliminate the recessionary gap? (e) Assume that investment, net exports, and taxes are zero.Government expenditures are $20 and the full-employment level of real GDP is $330.By how much must government spending be reduced to eliminate the inflationary gap?