Question 1

The recessionary expenditure gap associated with the recession of 2007-2009 resulted from:

Accepted Answer

The recessionary expenditure gap occurs when aggregate demand is insufficient to maintain full employment. Investment spending is an important component of aggregate demand, and the rapid decline in investment spending during the recession of 2007-2009 contributed to the recessionary expenditure gap. The other choices (A, B, and D) are not relevant to the recessionary expenditure gap in this context.

Question 2

In the aggregate expenditures model presented in the textbook,investment is assumed to rise with increases in real GDP and fall with decreases in real GDP.

Accepted Answer

The answer of In the aggregate expenditures model presented in...

Question 3

Viewed through the aggregate expenditures model,the U.S.recession of 2007-2009 resulted mainly from:

Accepted Answer

The U.S. recession of 2007-2009 resulted mainly from insufficient aggregate expenditures. This means that total spending in the economy was not enough to support production and employment levels. This can result from various factors, such as a decline in consumer confidence, a decrease in investment by firms, or a decrease in government spending. However, in this case, reduced government spending and increased taxes were not the main causes of the recession. Similarly, a fall in the average propensity to save might affect aggregate expenditures, but it is not the main reason for the recession.

Question 4

Say's law and classical macroeconomics were disputed by:

Accepted Answer

Say's law and classical macroeconomics were disputed by John Maynard Keynes, who introduced the concept of aggregate demand and argued that during recessions, inadequate aggregate demand could lead to high levels of unemployment and a decline in economic output. This contradicted the classical view that markets would naturally self-correct and return to equilibrium.

Question 5

If the MPC is .50 and the equilibrium GDP is $40 billion below the full-employment GDP,then the size of the recessionary expenditure gap is:

Accepted Answer

The recessionary expenditure gap is the amount by which aggregate expenditures need to increase to achieve full-employment GDP. With an MPC of 0.50, the multiplier is 1/(1-MPC) = 2. Therefore, to close a $40 billion GDP gap, expenditures need to increase by $40 billion / 2 = $20 billion.

Question 6

If an increase in aggregate expenditures results in no increase in real GDP,we can surmise that the:

Accepted Answer

If an increase in aggregate expenditures results in no increase in real GDP, it implies that the economy is already operating at full employment. This means that any increase in demand will not lead to an increase in output as the economy has reached its production capacity. Therefore, the answer is C.

Question 7

In an aggregate expenditures diagram,equal increases in government spending and in lump-sum taxes will:

Accepted Answer

The answer of In an aggregate expenditures diagram,equal increases in...

Question 8

An inflationary expenditure gap is the amount by which:

Accepted Answer

An inflationary expenditure gap exists when aggregate expenditures exceed the full-employment level of GDP. This creates upward pressure on prices, leading to inflationary pressure.

Question 9

If the economy is in equilibrium at $400 billion of GDP and the full-employment GDP is $500 billion:

Accepted Answer

Since the economy is already in equilibrium, there is no reason for real or nominal GDP to increase or for the price level to increase. The only way for GDP to reach the full-employment level of $500 billion is if aggregate expenditures increase. Therefore, GDP will remain at $400 billion unless aggregate expenditures change.

Question 10

If the MPS is .25 and the economy has a recessionary expenditure gap of $5 billion,then equilibrium GDP is:

Accepted Answer

The formula to calculate the equilibrium GDP in a recessionary expenditure gap is:
Equilibrium GDP = Full-employment GDP - (MPS x Recessionary Expenditure Gap)
Using the given values, we can calculate the equilibrium GDP as:
Equilibrium GDP = Full-employment GDP - (0.25 x $5 billion)
Equilibrium GDP = Full-employment GDP - $1.25 billion
Since the economy has a recessionary expenditure gap, the equilibrium GDP is below the full-employment GDP. Therefore, the correct answer is (C) $20 billion below the full-employment GDP.

Question 11

Assume in a private closed economy that the equilibrium level of income is $380 and the MPS is .25.Now suppose government collects taxes of $50 and spends the entire amount.As a result:

Accepted Answer

The answer of Assume in a private closed economy that...

Question 12

Graphically,the height of the investment schedule depends on the real interest rate,together with the location of the investment demand curve.

Accepted Answer

The height of the investment schedule is determined by the real interest rate, as it represents the cost of borrowing for firms. However, the location of the investment demand curve, which reflects the expected rate of return on investment projects, will also influence the level of investment at each interest rate. Together, these factors determine the quantity of investment demanded at each level of the real interest rate.

Question 13

A recessionary expenditure gap exists if:

Accepted Answer

A recessionary expenditure gap exists when the aggregate expenditures schedule (AE) lies below the 45-degree line at the full-employment GDP. This means that at the current level of GDP there is insufficient aggregate demand to produce at full employment. The actual output will be less than the potential output.

Question 14

Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion.If the MPC is .625,what change in aggregate expenditures is needed to achieve full employment?

Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.625) = 2.67. The income gap is $240 billion - $200 billion = $40 billion. The change in aggregate expenditures needed is $40 billion / 2.67 = $15 billion.

Question 15

Equal increases in government purchases and taxes will:

Accepted Answer

The answer of Equal increases in government purchases and taxes...

Question 16

Which of the following statements concerning the equilibrium level of GDP is incorrect?

Accepted Answer

The equilibrium level of GDP does not necessarily guarantee full employment, as there can still be some degree of unemployment even when GDP is at its most efficient level.

Question 17

The U.S.recession of 2007-2009 provides a good example of:

Accepted Answer

The U.S. recession of 2007-2009 was characterized by a significant decrease in overall economic activity, resulting in a recessionary expenditure gap. This means that there was a decrease in aggregate demand, leading to decreased production and employment. The other options mentioned, demand-pull inflation and cost-push inflation, refer to situations where prices are rising due to increases in demand or costs. Neither of these was particularly relevant to the U.S. recession of 2007-2009. Hyperinflation, on the other hand, refers to a situation where prices are rising so rapidly that they are out of control, also not applicable to the U.S. recession of 2007-2009.

Question 18

In an effort to stop the U.S.recession of 2007-2009,the federal government:

Accepted Answer

The federal government reduced taxes and increased government spending in an effort to stimulate economic activity and stop the recession. This is in line with Keynesian economic theories, which suggest that deficit spending during a recession can help boost demand and GDP.

Question 19

A recessionary expenditure gap is:

Accepted Answer

A recessionary expenditure gap occurs when the full-employment GDP exceeds the level of aggregate expenditures, indicating insufficient demand to achieve full employment.

Question 20

Classical macroeconomics was dealt severe blows by:

Accepted Answer

The Great Depression exposed the limitations of classical macroeconomic theory, leading to the development of Keynesian economics, which emphasized the role of government intervention in stabilizing the economy. This challenged the classical belief in laissez-faire policies and the self-correcting nature of markets.

Quiz 30: The Aggregate Expenditures Model