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Macroeconomics Study Set 43

Business

Quiz 11 :

A: The Aggregate Expenditures Model

Quiz 11 :

A: The Aggregate Expenditures Model

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What is the effect of net exports, either positive or negative, on equilibrium GDP?
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Positive net exports increase aggregate expenditures beyond what they would be in a closed economy and thus have an expansionary effect.The multiplier effect also is at work.Positive net exports will lead to a positive change that is greater than the amount of the initial change.Negative net exports decrease aggregate expenditures beyond what they would be in a closed economy and thus have a contractionary effect.The multiplier effect also is at work here.Negative net exports lead to a negative change in equilibrium GDP that is greater than the initial change.

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Other things being constant, what will be the effect of each of the following upon the equilibrium level of GDP? (a) An increase in the amount of liquid assets consumers are holding; (b) A sharp rise in stock prices; (c) A rapid upsurge in the rate of technological advance; and (d) A sharp increase in the interest rate.
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(a) This should increase GDP because an increase in consumer wealth would lead to an increase in consumer spending which would shift the aggregate expenditures curve upward to a higher equilibrium output level.
(b) The probable effect of a sharp rise in stock prices would be to increase in consumption by shareholders who have seen an increase in wealth, thus shifting the aggregate expenditures curve upward and increasing the equilibrium level of GDP.It also could encourage business investment with funds gained by issuing new shares of stock at the now higher prices.This would also tend to increase GDP.
(c) This should increase GDP because of the impact on new investment spending and possible increased consumer purchases of goods having the new technology.The aggregate expenditures curve will shift upward and real output will rise.
(d) A sharp increase in the interest rate would limit consumer durable purchases and also limit investment spending.Both of these events would cause a downward shift in aggregate expenditures causing a decrease in GDP.

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If prices are stuck, how can firms receive feedback from the market to tell them how much to produce?
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When underlying conditions change, but the price cannot change, firms take their signals from unplanned changes in their inventories.

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The aggregate expenditures model has one over-arching assumption.What is this assumption?
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What is the difference between the investment-demand curve and the investment schedule for the economy?
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Define the equilibrium level of output.
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In addition to stuck prices, what are the two simplifying assumptions of the initial model in this chapter? What are two implications from these simplifications?
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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.
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Explain the difference between an equilibrium level of GDP and a level of GDP that is in disequilibrium.
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Evaluate the statement that "for an open economy the equilibrium GDP always corresponds with an equality of exports and imports."
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In a graph relating private spending (C + Ig) to real gross domestic product (GDP), what does the 45-degree line represent?
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Explain why saving equals planned investment at equilibrium GDP.
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How does the fact that imports vary directly with GDP affect the stability of the domestic economy?
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Explain why exports are added to, and imports are subtracted from, aggregate expenditures in moving from a closed to an open economy.
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Use the graph below to explain the determination of equilibrium GDP by the aggregate expenditures-domestic output approach.At equilibrium C + Ig = Real GDP ($550 + $50 = $600).Why does the intersection of the aggregate expenditures schedule and the 45-degree line determine the equilibrium GDP? img
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Explain the difference between planned and actual investment in the economy.Why is the distinction important?
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What are two components of aggregate expenditures in a closed private economy?
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Whenever there is a shift in the investment schedule and/or the consumption-saving schedules, there will be a new equilibrium level of GDP.Explain why this is so.
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What differentiates the planned equilibrium level of investment from disequilibrium levels of investment? Explain.
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What is the relationship between actual investment, planned investment, and saving in an economy? What conditions among these concepts produce equilibrium?
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