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Economics Principles, Problems, and Policies

Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn

Chapter 28

The Aggregate Expenditures Model - all with Video Answers

Educators

Chapter Questions

01:25

Problem 1

What is an investment schedule and how does it differ from an investment demand curve?

Anand Jangid
Anand Jangid
Numerade Educator
05:02

Problem 2

Assuming the level of investment is 16 billion dollar and independent of the level of total output, complete the accompanying table and determine the equilibrium levels of output and employment in this private closed economy. What are the sizes of the MPC and MPS? (GRAPH CAN'T COPY)

Mihir Nayar
Mihir Nayar
Numerade Educator
04:45

Problem 3

Using the consumption and saving data in question 2 and assuming investment is 16 billion dollar, what are saving and planned investment at the 380 billion dollar level of domestic output? What are saving and actual investment at that level? What are saving and planned investment at the 300 billion dollar level of domestic output? What are the levels of saving and actual investment? Use the concept of unplanned investment to explain adjustments toward equilibrium from both the 380 billion dollar and the 300 billion dollar levels of domestic output.

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
05:03

Problem 4

Why is saving called a leakage? Why is planned investment called an injection? Why must saving equal planned investment at equilibrium GDP in the private closed economy? Are unplanned changes in inventories rising, falling, or constant at equilibrium GDP? Explain.

Mihir Nayar
Mihir Nayar
Numerade Educator
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Problem 5

What effect will each of the changes listed in Study Question 3 of Chapter 27 have on the equilibrium level of GDP in the private closed economy? Explain your answers.

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
02:49

Problem 6

By how much will GDP change if firms increase their investment by 8 billion dollar and the $M P C$ is $.80 ?$ If the $M P C$
is $.67 ?$

Mihir Nayar
Mihir Nayar
Numerade Educator
02:27

Problem 7

Depict graphically the aggregate expenditures model for a private closed economy. Now show a decrease in the aggregate expenditures schedule and explain why the decline in real GDP in your diagram is greater than the initial decline in aggregate expenditures. What would be the ratio of a decline in real GDP to the initial drop in aggregate expenditures if the slope of your aggregate expenditures schedule was .8?

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
03:15

Problem 8

Suppose that a certain country has an MPC of .9 and a real GDP of 400 billion dollar. If its investment spending decreases by 4 billion dollar, what will be its new level of real GDP?

Mihir Nayar
Mihir Nayar
Numerade Educator
06:21

Problem 9

The data in columns 1 and 2 in the accompanying table are for a private closed economy:
a. Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy.(GRAPH CAN'T COPY)

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
04:44

Problem 10

Assume that, without taxes, the consumption schedule of an economy is as follows: (GRAPH CAN'T COPY)
a. Graph this consumption schedule and determine the $\mathrm{MPC}$
b. Assume now that a lump-sum 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.

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
09:57

Problem 11

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 its impact on equilibrium GDP. Finally, add taxation (any amount of lump-sum tax b. 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. Explain why this equilibrium GDP differs from that of the closed economy.
c. Given the original 20 billion dollar level of exports, what would be net exports and the equilibrium GDP if imports were 10 billion dollar greater at each level of GDP?
d. What is the multiplier in this example? 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.

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
04:28

Problem 12

KEY QUESTION Refer to columns 1 and 6 in the table for question $9 .$ Incorporate government into the table by assuming that it plans to tax and spend 20 billion dollar 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. Compute and explain the change in equilibrium GDP caused by the addition of government.

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
05:59

Problem 13

Text Unavailable

Refer to the table on the next page in answering the questions that follow:
a. 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? Explain. What is the multiplier in this example?
b. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is 500 billion dollar? Explain the consequences. 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?
c. Assuming that investment, net exports, and government expenditures do not change with changes in real GDP, what are the sizes of the MPC, the MPS, and the multiplier? (GRAPH CAN'T COPY)

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
03:05

Problem 14

Assume that the consumption schedule for a private open economy is such that consumption $C=50+0.8 Y$. Assume further that planned investment $I_{g}$ and net exports $X_{n}$ are independent of the level of real GDP and constant at $I_{g}=30$ and $X_{n}=10 .$ Recall also that, in equilibrium, the real output produced $(Y)$ is equal to aggregate expenditures: $Y=C+I_{g}+X_{n} .$
a. Calculate the equilibrium level of income or real GDP for this economy.
b. What happens to equilibrium $Y$ if $I_{g}$ changes to 10 ? What does this outcome reveal about the size of the multiplier?

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
03:15

Problem 15

Answer the following questions, which relate to the aggregate expenditures model:
a. If $C_{a}$ is 100 dollar I$_{g}$$ is 50 dollar, X_{n}$ is - 10, and G is 30 dollar, what is the economy's equilibrium GDP?
b. If real GDP in an economy is currently 200, C$_{a}$$ is 100, I_{g}$ is 50 dollar, X$_{n}$$ is $-S 10 dollar, and G is 30 dollar, will the economy's real GDP rise, fall, or stay the same?
c. Suppose that full-employment (and full-capacity) output in an economy is 200 dollar. If $C_{a}$$ is 150, I_{g}$ is 50 dollar, X_{n} is - 10 dollar and $G$ is 30 dollar, what will be the macroeconomic result?

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
01:36

Problem 16

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' view on this matter.

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator