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Chapter 11 - The Aggregate Expenditures Model
11-18
22. The data in the first two columns below are for a private closed economy. Use this table to answer the
following questions.
Chapter 11 - The Aggregate Expenditures Model
11-19
Real GDP = DI
(billions) Aggregate expenditures
(billions)
Exports
(billions)
Imports
(billions) Net
exports
(billions) Aggregate expenditures
(billions)
$ 80 $100 $15 $5 $_____ $_____
120 130 15 5 _____ _____
160 160 15 5 _____ _____
200 190 15 5 _____ _____
240 220 15 5 _____ _____
280 250 15 5 _____ _____
320 280 15 5 _____ _____
360 310 15 5 _____ _____
(a) What is the equilibrium GDP for the private closed economy?
(b) Including the international trade figures for exports and imports, calculate net exports and determine
the equilibrium GDP for a private open economy.
(c) What will happen to equilibrium GDP if exports were $10 billion larger at each level of GDP?
(d) What will happen to equilibrium GDP if exports remained at $15 billion, but imports rose to $15
billion?
(e) What is the size of the multiplier in this economy?
Chapter 11 - The Aggregate Expenditures Model
23. Is there a multiplier effect from increases and decreases in net exports?
Chapter 11 - The Aggregate Expenditures Model
24. Explain the relationship between U.S. net exports and the prosperity of trading partners for the United
States.
25. Describe how a sustained depreciation of the U.S. dollar over time is likely to affect U.S. net exports.
26. How will a sustained appreciation of the U.S. dollar over time likely affect U.S. net exports?
27. Assume that the United States raises tariffs on products imported from other countries. What effect will
this U.S. trade policy have in the short run if other nations do not change their policy? What effect will this
policy have in the long run if other nations retaliate?
28. Why will using currency devaluations and imposing tariffs be counterproductive to pull the United States
out of a recession?
29. Describe the probable impact of an increase in government spending assuming no change in taxes or
private spending and less than full-employment output.
Chapter 11 - The Aggregate Expenditures Model
11-22
30. Identify the relationship between GDP, taxes, and disposable income.
31. “If taxes and government spending are increased by the same amount, there will still be a positive effect on
equilibrium GDP.” Explain.
32. Why don’t identical shifts in government spending and taxes have the same effect on GDP?
33. With the additional leakages of imports and taxes in additional to savings in a public, open economy, how
is the economy still able to reach equilibrium?
34. Compare and contrast the recessionary expenditure gap and the inflationary expenditure gap.
35. If there is a recessionary expenditure gap of $100 billion and the MPC is 0.80, by how much must taxes be
reduced to eliminate the recessionary expenditure gap?
Chapter 11 - The Aggregate Expenditures Model
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36. Assume the level of investment is $8 billion and independent of the level of total output. Complete the
following table and determine the equilibrium level of output and income which the private sector of this
closed economy would provide.
Chapter 11 - The Aggregate Expenditures Model
11-24
Possible employment
levels (millions) Real GDP = DI
(billions) Consumption
(billions) Saving
(billions)
80 $120 $122 $_____
90 130 130 _____
100 140 138 _____
110 150 146 _____
120 160 154 _____
130 170 162 _____
140 180 170 _____
150 190 178 _____
160 200 186 _____
(a) If this economy has a labor force of 140 million, will there be a recessionary or inflationary
expenditure gap? Explain the consequences of this gap.
(b) If the labor force is 110 million, will there be an inflationary or recessionary expenditure gap? Explain
the consequences of this gap.
(c) What are the sizes of the MPC, MPS, and multiplier in this economy?
(d) Using the multiplier concept, give the increase in equilibrium GDP that would occur if the level of
investment increased from $8 billion to $10 billion.
Chapter 11 - The Aggregate Expenditures Model
11-25
37. Assume the level of investment is $8 billion and independent of the level of total output. Complete the
following table and determine the equilibrium level of output and income which the private sector of this
closed economy would provide.
Chapter 11 - The Aggregate Expenditures Model
11-26
Possible employment
levels (millions) Real GDP = DI
(billions) Consumption
(billions) Saving
(billions)
50 $ 80 $ 83 $_____
60 90 90 _____
70 100 97 _____
80 110 104 _____
90 120 111 _____
100 130 118 _____
110 140 125 _____
120 150 132 _____
130 160 139 _____
(a) If this economy has a labor force of 110 million, will there be a recessionary or inflationary
expenditure gap? Explain the consequences of this gap.
(b) If the labor force is 80 million, will there be an inflationary or recessionary expenditure gap? Explain
the consequences of this gap.
(c) What are the sizes of the MPC, MPS, and multiplier in this economy?
(d) Using the multiplier concept, give the increase in equilibrium GDP that would occur if the level of
investment increased from $8 billion to $10 billion.
Chapter 11 - The Aggregate Expenditures Model
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Chapter 11 - The Aggregate Expenditures Model
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38. Refer to the following table to answer the questions.
Chapter 11 - The Aggregate Expenditures Model
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(1)
Possible levels of employment,
millions (2)
Real domestic output,
billions (3)
Aggregate expenditures
(Ca + Ig + Xn + G),
billions
45 $250 $260
50 275 280
55 300 300
60 325 320
65 350 340
(a) If full employment in this economy is 65 million, will there be an inflationary or 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 or
recessionary expenditure gap? Explain.
(b) Will there be an inflationary or recessionary expenditure gap if the full-employment level of output is
$250 billion? Explain the consequences. By how much would aggregate expenditures in column 3
have to change at each level of GDP to eliminate the inflationary or recessionary expenditure gap?
Explain.
(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?
39. Use the table below to answer the following questions.
Real GDP C
$500 $495
510 504
520 513
530 522
540 531
550 540
560 549
(a) What is the size of the multiplier in this economy?
(b) If taxes were zero, government purchases were $5, investment is $3, and net exports are zero, what is
the equilibrium GDP?
(c) If taxes are $10, government purchases are $10, investment is $6, and net exports are zero, what is the
equilibrium GDP?
(d) Assume investment is $50, taxes are $50, and net exports and government purchases are each zero.
The full-employment level of GDP is $545. How much of a reduction in taxes is needed to eliminate
the recessionary expenditure gap?
(e) Assume that investment, net exports, and taxes are zero. Government purchases are $30 and the full-
employment GDP without inflation is $530. By how much must government spending be reduced to
eliminate the inflationary expenditure gap?
Chapter 11 - The Aggregate Expenditures Model
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40. Use the table below to answer the following questions.
Real GDP C
$300 $290
310 298
320 306
330 314
340 322
350 330
360 338
(a) What is the size of the multiplier in this economy?
(b) If taxes were zero, government purchases were $10, investment $6, and net exports are zero, what is
the equilibrium GDP?
(c) If taxes are $5, government purchases 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 purchases are each zero. The
full-employment level of GDP is $340. How much of a reduction in taxes is needed to eliminate the
recessionary expenditure gap?
(e) Assume that investment, net exports, and taxes are zero. Government purchases are $30 and the full-
employment GDP without inflation is $330. By how much must government spending be reduced to
eliminate the inflationary expenditure gap?
Chapter 11 - The Aggregate Expenditures Model
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41. If there is an inflationary expenditure gap of $80 billion and the MPC is 0.75, by a) how much should
government expenditure (G) change it to reduce the gap? b) By how much should taxes (T) change? (c)
Why are the changes in G and T different?
42. What two solutions did Keynes suggest as appropriate government policies in order to close a recessionary
gap? Does the assumption of stuck prices hold true when the economy moves close to its potential output?
Explain.
43. Explain how the recession of 2007–2009 in the United States provides an example of a recessionary
expenditure gap.
44. (Advanced analysis) Suppose that the linear equation for consumption in a hypothetical economy is C = 50
+ 0.9 Y. Also suppose that income (Y) is $400. Determine the following: (a) MPC; (b) MPS; (c) level of
consumption; (d) APC; (e) APS.
45. (Advanced analysis) Assume the following output-income and saving data for the private sector of the
economy.
Real GDP (Y) Consumption (C)
$240 $244
260 260
280 276
300 292
320 308
340 324
360 340
380 356
400 372
(a) Describe the consumption schedule in equation form.
Chapter 11 - The Aggregate Expenditures Model
(b) Assuming net investment is $5 billion and independent of the level of GDP, what will be the
equilibrium level of GDP?
(c) Assuming net investment of $15 billion and independent of the level of GDP, what will be the
equilibrium level of GDP?
(d) Using your answers to (a) and (b), find the size of the multiplier.
(e) Check your answer using the MPC embodied in these data.
46. (Advanced analysis) Assume the consumption schedule for the economy is such that C = 50 + 0.8Y.
Assume further that investment and net exports are autonomous or independent of the level of income and
gross investment is 40 and net exports equal −10. Recall that in equilibrium, Y = C + Ig + Xn.
(a) Calculate the equilibrium level of income for this economy.
(b) What will happen to equilibrium Y if gross investment falls to 20? What does this tell us about the size
of the multiplier?
47. (Advanced analysis) Assume that without any taxes the consumption schedule for an economy is as shown
in the table.
GDP (billions) Consumption (billions)
$ 200 $ 240
400 400
600 560
800 720
1000 880
1200 1040
1400 1200
(a) Graph the consumption schedule and note the size of the MPC and multiplier using the below graph.
(b) Assume a lump-sum regressive tax of $10 billion is imposed at all levels of GDP. Calculate the tax
rate at each level of GDP and graph the resulting consumption schedule. Compare the MPC and the
multiplier with the pretax consumption schedule. MPC and the multiplier are unchanged.
(c) Explain why a proportional or progressive tax system would contribute to greater economic stability as
compared with the regressive lump-sum tax. Demonstrate graphically using a 10% proportional tax.
Chapter 11 - The Aggregate Expenditures Model
48. (Last Word) Explain Say’s law.
49. (Last Word) “If production results in income and income is the source of spending, it would seem that the
production of a full-employment economy would automatically guarantee enough spending to sustain itself.
How, then, can unemployment occur?” Explain.
50. (Last Word) What two events undermined the theory that supply creates its own demand?
51. (Last Word) Contrast the classical and Keynesian views of unemployment.
