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Chapter 11 - The Aggregate Expenditures Model
CHAPTER ELEVEN
THE AGGREGATE EXPENDITURES MODEL
CHAPTER OVERVIEW
We have seen in Chapter 10 three basic relationships: how income relates to consumption and saving,
how the interest rate affects investment spending, and how changes in spending work through the system
to create larger changes in output. In this chapter we build the more theoretically rigorous explanation
for these relationships – the Aggregate Expenditures (AE) Model.
The chapter begins with the simple version of the AE model, that of a closed, private economy.
Equilibrium GDP is determined and multiplier effects are briefly reviewed. The simplified “closed”
economy is then “opened” to show how it would be affected by exports and imports. Government
spending and taxes are brought into the model to include the “public” aspects of the system. Finally, the
model is applied to two historical periods in order to consider some of the model’s deficiencies. The
price level is assumed constant in this chapter unless stated otherwise, so the focus is on real GDP.
The Last Word traces briefly the historical development of the AE theory.
WHAT’S NEW
The Learning Objectives have been completely revised. There are now eight learning objectives for this
chapter.
Parts a and b in Figure 11.4 have been exchanged to match the order of the text.
The relevant tables and data have been updated.
INSTRUCTIONAL OBJECTIVES
After completing this chapter, students should be able to:
1. Identify the simplifying assumptions of the Aggregate Expenditures (AE) model.
2. Explain the relationship between the investment demand curve and the investment schedule.
3. Use the consumption and investment schedules to determine the equilibrium level of GDP.
4. Explain verbally and graphically the equilibrium level of GDP.
5. Explain why above-equilibrium or below-equilibrium GDP levels will not persist.
6. Explain the basics of the classical view that the economy would generally provide full employment
levels of output.
7. Trace the changes in GDP that will occur when there is a discrepancy between saving and planned
investment.
8. Use the multiplier to find changes in GDP resulting from changes in spending.
9. Define the net export schedule.
10. Explain the impact of positive (or negative) net exports on aggregate expenditures and the
equilibrium level of real GDP.
11-1
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Chapter 11 - The Aggregate Expenditures Model
11. Explain the effect of increases (or decreases) in exports on real GDP.
12. Explain the effect of increases (or decreases) in imports on real GDP.
13. Describe how government purchases affect equilibrium GDP.
14. Describe how personal taxes affect equilibrium GDP.
15. Explain why an equal amount of government purchases and taxes will have a differential impact on
GDP.
16. Identify a recessionary expenditure gap and explain how it relates to the U.S. recession of 2007 -
2009.
17. Identify an inflationary gap.
18. Explain how the aggregate expenditures model emerged as a critique of Classical economics and in
response to the Great Depression.
19. Define and identify terms and concepts listed at the end of the chapter.
COMMENTS AND TEACHING SUGGESTIONS
1. Some instructors may choose to skip this chapter. However, students could still benefit from the
Last Word for Chapter 11.
2. Note that net exports are kept as independent of the level of GDP to keep the analysis simple. You
may want to note in passing that, in fact, there tends to be a direct relationship between import
spending and the level of GDP.
3. The Last Word for this chapter provides historical backdrop for Keynesian theory. Impress upon
students that Keynes developed the theory that emphasizes the importance of aggregate demand for
economic performance. You may want to point out that his theory changed the way economists
viewed the modern capitalist system and that he has been credited with the development of
macroeconomics as a separate field. Stress that debate still lingers over whether the system is
self-correcting during periods of unemployment or inflation.
4. The following “Concept Illustration” may be useful in conveying the leakages-injections approach
to equilibrium GDP.
Concept Illustration … Leakages and Injections
A bathtub analogy is useful in illustrating the injections-leakages approach to equilibrium real
domestic output and income (real GDP) in the private, closed economy. A tub’s faucet enables an
inflow of water and the tub’s drain allows an outflow of water. Any particular level of water in the
tub remains constant when the inflow from the faucet equals the outflow from the drain. If the
inflow exceeds the outflow, the level of water rises. If the inflow is less than the outflow, the level
of water level recedes.
The inflow, outflow, and level of water in the tub are analogous to investment (Ig), saving (S), and
real GDP, respectively, in a private, closed economy. Equilibrium real GDP occurs where the
investment injection (inflow) just equals the saving leakage (drain). If the investment injection
exceeds the saving leakage, real GDP expands until saving increases sufficiently to equal the level
of investment. If the investment injection is less than the saving leakage, real GDP declines until
saving falls sufficiently to equal investment. In both cases equilibrium is achieved where
investment equals saving.
In the economy represented in Table 11.2, equilibrium real GDP is $470 billion. In view of the bathtub
analogy, it is not surprising to discover that investment and saving flows are each $20 billion.
11-2
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Chapter 11 - The Aggregate Expenditures Model
5. After learning the AE model, students may reach the conclusion that increasing saving is bad
because of the contractionary impact it has on consumption and, by extension, aggregate spending.
This is, of course, the famous “paradox of thrift,” and if you choose to include such a discussion in
your course, you may find the following “Concept Illustration” useful.
Concept Illustration … The Paradox of Thrift
In Chapter 1 we said that a higher rate of saving is good for society because it frees resources from
consumption uses and directs them toward investment goods. More machinery and equipment
means a greater capacity for the economy to produce goods and services.
But implicit within this “saving is good” proposition is the assumption that increased saving will be
borrowed and spent for investment goods. If investment does not increase along with saving, a
curious irony called the paradox of thrift may arise. The attempt to save more may simply reduce
GDP and leave actual saving unchanged.
Our analysis of the multiplier process helps explain this possibility. Suppose an economy that has a
MPC of .75, a MPS of .25, and a multiplier of 4, decides to save an additional $200 billion. From
the social viewpoint, a penny saved that is not invested is a penny not spent and therefore a decline
in someone’s income. Through the multiplier process, the $200 billion of reduced consumption
spending lowers real GDP by $800 billion (4 x $200 billion).
The $800 billion decline of real GDP, in turn, reduces saving by $200 billion (= MPS of .25 x $800
billion), which completely cancels the initial $200 billion increase of saving. Here, the attempt to
increase saving is bad for the economy: It creates a recession and leaves saving unchanged.
For increased saving to be good for an economy, greater investment must accompany greater
saving. If investment replaces consumption dollar-for-dollar, aggregate expenditures stay constant
and the higher level of investment raises the economy’s future growth rate.
STUDENT STUMBLING BLOCKS
1. When introducing the investment, net export, and government purchases schedules, be sure to
emphasize that the graphs are horizontal because of the exogenous nature of the variables, not
because the values are unchanging.
2. When the model is complete (GDP = C + Ig + Xn + G), students may confuse the equilibrium
equation with the accounting identity presented in Chapter 7. You may need to visually separate
planned and unplanned investment in the equation to help them see the difference between the two
equations.
3. Some students will need to be reminded that in the AE model, unplanned inventory build-ups or
depletions are corrected by adjusting production, not by altering prices.
LECTURE NOTES
I. Introduction
A. Learning objectives – After reading this chapter, students should be able to:
1. Explain how sticky prices relate to the aggregate expenditures model.
2. Explain how an economy's investment schedule is derived from the investment demand
curve and an interest rate.
11-3
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Chapter 11 - The Aggregate Expenditures Model
3. Illustrate how economists combine consumption and investment to depict an aggregate
expenditures schedule for a private closed economy and how that schedule can be used to
demonstrate the economy's equilibrium level of output (where the total quantity of goods
produced equals the total quantity of goods purchased).
4. Discuss the two other ways to characterize the equilibrium level of real GDP in a private
closed economy: saving = investment; and no unplanned changes in inventories.
5. Analyze how changes in equilibrium real GDP can occur in the aggregate expenditures
model and how those changes relate to the multiplier.
6. Explain how economists integrate the international sector (exports and imports) into the
aggregate expenditures model.
7. Explain how economists integrate the public sector (government expenditures and taxes)
into the aggregate expenditures model.
8. Differentiate between equilibrium GDP and full-employment GDP and identify and
describe the nature and causes of "recessionary expenditure gaps" and "inflationary
expenditure gaps."
B. This chapter focuses on the aggregate expenditures model. We use the definitions and facts
from previous chapters to shift our study to the analysis of economic performance. The
aggregate expenditures model is one tool in this analysis. Recall that “aggregate” means
total.
C. As explained in this chapter’s Last Word, the model originated with John Maynard Keynes
(Pronounced “Canes”).
D. The focus is on the relationship between income and consumption and savings.
E. Investment spending, net exports, and government purchases, important parts of aggregate
expenditures are also examined.
F. Finally, these spending categories are combined to explain the equilibrium levels output and
employment in at first a private (no government), domestic (no foreign sector) economy.
Therefore, GDP=NI=PI=DI in this very simple model.
G. The revised model adds realism by including the foreign sector and government in the
aggregate expenditures model.
II. Assumptions and Simplifications
A. Keynes developed the aggregate expenditures model during the Great Depression because
previous economic theory predicted that prices would fall to boost spending and move the
economy to full-employment.
1. Prices did not fall sufficiently during the Great Depression.
2. Keynes’ model is based on fixed prices and the adjustment of employment and GDP to
economic shocks when prices are inflexible.
B. We first assume a “closed economy” with no international trade.
C. Government is ignored.
D. Although both households and businesses save, we assume here that all saving is personal.
E. Depreciation and net foreign income are assumed to be zero for simplicity.
F. There are two reminders concerning these assumptions.
1. They leave out two key components of aggregate demand (government spending and
foreign trade), because they are largely affected by influences outside the domestic
market system.
2. With no government or foreign trade, GDP, national income (NI), personal income (PI),
and disposable income (DI) are all the same.
11-4
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Chapter 11 - The Aggregate Expenditures Model
III. Consumption and Investment Schedules
A. The theory assumes that the level of output and employment depend directly on the level of
aggregate expenditures. Changes in output reflect changes in aggregate spending.
B. In a closed private economy the two components of aggregate expenditures are consumption
and gross investment.
C. The consumption schedule was developed in Chapter 10 (see Figure 10.2a).
D. In addition to the investment demand schedule, economists also define an investment
schedule that shows the amounts business firms collectively intend to invest at each possible
level of GDP or DI.
1. In developing the investment schedule, it is assumed that investment is independent of
the current income. The line Ig (gross investment) in Figure 11.1b shows this graphically
related to the level determined by Figure 11.1a.
2. The assumption that investment is independent of income is a simplification, but will be
used here.
3. Figure 11.1a shows the investment schedule from GDP levels given in Table 10.1.
IV. Equilibrium GDP: C+Ig = GDP
A. Look at Table 11.2, which combines data of Tables 10.1 and 11.1.
B. Real domestic output in column 2 shows ten possible levels that producers are willing to
offer, assuming their sales would meet the output planned. In other words, they will produce
$370 billion of output if they expect to receive $370 billion in revenue.
C. Ten levels of aggregate expenditures are shown in column 6. The column shows the amount
of consumption and planned gross investment spending (C + Ig) forthcoming at each output level.
1. Recall that consumption level is directly related to the level of income and that here
income is equal to output level.
2. Investment is independent of income here and is planned or intended regardless of the
current income situation.
D. Equilibrium GDP is the level of output whose production will create total spending just
sufficient to purchase that output. Otherwise there will be a disequilibrium situation.
1. In Table 11.2, this occurs only at $470 billion.
2. At $410 billion GDP level, total expenditures (C + Ig) would be $425 = $405(C) + $20
(Ig) and businesses will adjust to this excess demand (revealed by the declining
inventories) by stepping up production. They will expand production at any level of GDP
less than the $470 billion equilibrium.
3. At levels of GDP above $470 billion, such as $510 billion, aggregate expenditures will be
less than GDP. At $510 billion level, C + Ig = $500 billion. Businesses will have unsold,
unplanned inventory investment and will cut back on the rate of production. As GDP
declines, the number of jobs and total income will also decline, but eventually the GDP
and aggregate spending will be in equilibrium at $470 billion.
E. Graphical analysis is shown in Figure 11.2 (Key Graph). At $470 billion it shows the C + Ig
schedule intersecting the 45-degree line which is where output = aggregate expenditures, or
the equilibrium position.
1. Observe that the aggregate expenditures line rises with output and income, but not as
much as income, due to the marginal propensity to consume (the slope) being less than 1.
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Chapter 11 - The Aggregate Expenditures Model
2. A part of every increase in disposable income will not be spent but will be saved.
3. Test yourself with Quick Quiz 11.2.
V. Other Features of Equilibrium GDP
A. Savings equals planned investment.
1. It is important to note that in our analysis above we spoke of “planned” investment. At
GDP = $470 billion in Table 11.2, both saving and planned investment are $20 billion.
2. Saving represents a “leakage” from spending stream and causes C to be less than GDP.
3. Some of output is planned for business investment and not consumption, so this
investment spending can replace the leakage due to saving.
a. If aggregate spending is less than equilibrium GDP as it is in Table 11.2, line 8 when
GDP is $510 billion, then businesses will find themselves with unplanned inventory
investment on top of what was already planned. This unplanned portion is reflected
as a business expenditure, even though the business may not have desired it, because
the total output has a value that belongs to someone—either as a planned purchase or
as an unplanned inventory.
b. If aggregate expenditures exceed GDP, then there will be less inventory investment
than businesses planned as businesses sell more than they expected. This is reflected
as a negative amount of unplanned investment in inventory. For example, at $450
billion GDP, there will be $435 billion of consumer spending and $20 billion of
planned investment, so businesses must have experienced a $5 billion unplanned
decline in inventory because sales exceeded what they expected.
B. No unplanned changes in inventories.
1. Consider row 7 of Table 11.2 where GDP is $490 billion, here C + Ig is only $485 billion
and will be less than output by $5 billion. Firms retain the extra $5 billion as unplanned
inventory investment. Actual investment is $25 billion, or $5 billion more than the $20
billion planned. So $490 billion is an above-equilibrium output level.
2. Consider row 5, Table 11.2. Here $450 billion is a below-equilibrium output level
because actual investment will be $5 billion less than planned. Inventories decline below
what was planned. GDP will rise to $470 billion.
VI. Changes in Equilibrium GDP and the Multiplier
A. As developed in Chapter 10, an initial change in spending will be acted on by the multiplier
to produce larger changes in output.
1. The “initial change” represented in the text and Figure 11.3 is in planned investment
spending. It could also result from a nonincome-induced change in consumption.
2. The multiplier in Figure 11.3 is 4 (=1/MPS)
B. Figure 11.3 shows the impact of changes in investment. Suppose investment spending rises
(due to a rise in profit expectations or to a decline in interest rates).
1. Figure 11.3 shows the increase in aggregate expenditures from (C + Ig)0 to (C + Ig)1. In
this case, the $5 billion increase in investment leads to a $20 billion increase in
equilibrium GDP.
2. Conversely, a decline in investment spending of $5 billion is shown to create a decrease
in equilibrium GDP of $20 billion to $450 billion.
VII. International Trade and Equilibrium Output
A. Net exports (exports minus imports) affect aggregate expenditures in an open economy.
Exports expand and imports contract aggregate spending on domestic output.
11-6
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Chapter 11 - The Aggregate Expenditures Model
1. Exports (X) create domestic production, income, and employment due to foreign
spending on U.S. produced goods and services.
2. Imports (M) reduce the sum of consumption and investment expenditures by the amount
expended on imported goods, so this figure must be subtracted so as not to overstate
aggregate expenditures on U.S. produced goods and services.
B. The net export schedule (Table 11.3):
1. Shows hypothetical amount of net exports (X - M) that will occur at each level of GDP
given in Table 11.2.
2. Assumes that net exports are autonomous or independent of the current GDP level.
3. Figure 11.4b shows Table 11.3 graphically.
a. Xn1 shows a positive $5 billion in net exports.
b. Xn2 shows a negative $5 billion in net exports.
C. The impact of net exports on equilibrium GDP is illustrated in Figure 11.4b.
1. 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. In Figure 11.4b we see that positive net exports of $5 billion lead to a positive
change in equilibrium GDP of $20 billion (to $490 from $470 billion). This comes from
Table 11.2 and Figure 11.3.
2. 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. In Figure 11.4b we see that negative net exports of $5 billion lead to a
negative change in equilibrium GDP of $20 billion (to $450 from $470 billion).
D. Global Perspective 11.1 shows 2012 net exports for various nations.
E. International economic linkages:
1. Prosperity abroad generally raises our exports and transfers some of their prosperity to
us. (Conversely, recession abroad has the reverse effect.)
2. Depreciation of the dollar lowers the cost of American goods to foreigners and
encourages exports from the U.S. while discouraging the purchase of imports in the U.S.
This could lead to higher real GDP or to inflation, depending on the domestic
employment situation. Appreciation of the dollar could have the opposite impact.
3. Nations must be cautious when using tariffs and devaluations in an effort to increase their
net exports and therefore their domestic employment and output. When other nations’
exports are restricted, they may retaliate; reducing the U.S. exports and actually causes
net exports to fall. This happened during the Great Depression.
VIII. Adding the Public Sector
A. Simplifying assumptions are helpful for clarity when we include the government sector in our
analysis. (Many of these simplifications are dropped in Chapter 13, where there is further
analysis on the government sector.)
1. Simplified the investment and net export schedules that are used. We assume they are
independent of the level of current GDP.
2. We assume government purchases do not impact private spending schedules.
3. We assume that net tax revenues are derived entirely from personal taxes so that GDP, NI,
and PI remain equal. DI is PI minus net personal taxes.
4. We assume tax collections are independent of GDP level (a lump-sum tax)
5. The price level is assumed to be constant unless otherwise indicated.
11-7
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Chapter 11 - The Aggregate Expenditures Model
B. Table 11.4 gives a tabular example of including $20 billion in government spending and
Figure 11.5 gives the graphical illustration. Note that the previous section’s net export
information has also been included.
1. Increases in government spending boost aggregate expenditures.
2. Government spending is subject to the multiplier.
C. Table 11.5 and Figure 11.6 show the impact of a tax increase.
1. Taxes reduce DI and, therefore, consumption and saving at each level of GDP.
2. An increase in taxes will lower the aggregate expenditures schedule relative to the 45-
degree line and reduce the equilibrium GDP.
3. Table 11.5 confirms that, at equilibrium GDP, the sum of leakages equals the sum of
injections. Saving + Imports + Taxes = Investment + Exports + Government Purchases.
D. Government purchases and taxes have different impacts.
1. In our example, equal additions in government spending and taxation increase the
equilibrium GDP.
a. If G and T are each increased by a particular amount, the equilibrium level of real
output will rise by that same amount.
b. In the text’s example, an increase of $20 billion in G and an offsetting increase of $20
billion in T will increase equilibrium GDP by $20 billion (from $470 billion to $490
billion).
2. The example reveals the rationale.
a. An increase in G is direct and adds $20 billion to aggregate expenditures.
b. An increase in T has an indirect effect on aggregate expenditures because T reduces
disposable incomes first, and then C falls by the amount of the tax times MPC.
c. The overall result is a rise in initial spending of $20 billion minus a fall in initial
spending of $15 billion (.75 x $20 billion), which is a net upward shift in aggregate
expenditures of $5 billion. When this is subject to the multiplier effect, which is 4 in
this example, the increase in GDP will be equal to 4 x $5 billion or $20 billion, which
is the size of the change in G.
IX. Equilibrium revisited
A. As demonstrated earlier, in a closed private economy equilibrium occurs
when saving (a leakage) equals planned investment (an injection).
B. With the introduction of a foreign sector (net exports) and a public sector
(government), new leakages and injections are introduced.
1. Imports and taxes are added leakages.
2. Exports and government purchases are added injections.
C. Equilibrium is found when the leakages equal the injections.
1. When leakages equal injections, there are no unplanned changes in
inventories.
2. Symbolically, equilibrium occurs when Sa + M + T = Ig + X + G, where
Sa is after-tax saving, M is imports, T is taxes, Ig is (gross) planned investment, X is
exports, and G is government purchases.
11-8
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Chapter 11 - The Aggregate Expenditures Model
X. Equilibrium vs. Full-Employment GDP
A. A recessionary expenditure gap exists when equilibrium GDP is below full-employment GDP.
(See Key Graph 11.7a)
1. Recessionary expenditure gap of $5 billion is the amount by which aggregate
expenditures fall short of those required to achieve the full-employment level of GDP.
2. In Table 11.5, assuming the full-employment GDP is $510 billion, the corresponding
level of total expenditures there is only $505 billion. The gap would be $5 billion, the
amount by which the schedule would have to shift upward to realize the full-employment
GDP.
3. Graphically, the recessionary expenditure gap is the vertical distance by which the
aggregate expenditures schedule (Ca + Ig + Xn + G)1 lies below the full-employment
point on the 45-degree line.
4. Because the multiplier is 4, we observe a $20-billion differential (the recessionary gap of
$5 billion times the multiplier of 4) between the equilibrium GDP and the full-
employment GDP.
B. An inflationary expenditure gap exists when aggregate expenditures exceed full-employment
GDP.
1. Figure 11.7b shows that a demand-pull inflationary expenditure gap of $5 billion exists
when aggregate spending exceeds what is necessary to achieve full employment.
2. The inflationary expenditure gap is the amount by which the aggregate expenditures
schedule must shift downward to realize the full-employment noninflationary GDP.
3. The effect of the inflationary expenditure gap is to pull up the prices of the economy’s
output.
4. In this model, if output can’t expand, pure demand-pull inflation will occur.
XI. Application: The Recession of 2007 – 2009
A. The economy entered a recession in December 2007
1. After-tax consumption and planned investment both decreased with a much greater fall in
investment.
2. Aggregate expenditures decreased (shifted down), creating the largest recessionary
expenditures gap since the Great Depression.
3. Unemployment rate increased to more than 10%.
B. Government adopted Keynesian policies in 2008 and 2009.
1. In 2008 Federal government provided $100 billion in tax rebate checks, hoping to
increase consumption and aggregate expenditures, but most people paid off their debt and
there was not any increase in aggregate expenditures.
2. In 2009 Federal government passed a $787 billion stimulus package with large increases
in government spending to try to increase aggregate expenditures, increase GDP and
increase employment.
3. Greater evaluation of these policies will take place in chapter 12.
XII. LAST WORD: Say’s Law, The Great Depression, and Keynes
A. Until the Great Depression of the 1930, most economists going back to Adam Smith had
believed that a market system would ensure full employment of the economy’s resources
except for temporary, short-term upheavals.
B. If there were deviations, they would be self-correcting. A slump in output and employment
would reduce prices, which would increase consumer spending; would lower wages, which
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Chapter 11 - The Aggregate Expenditures Model
would increase employment again; and would lower interest rates, which would expand
investment spending.
C. Say’s law, attributed to the French economist J. B. Say in the early 1800s, summarized the
view in a few words: “Supply creates its own demand.”
D. Say’s law is easiest to understand in terms of barter. The woodworker produces furniture in
order to trade for other needed products and services. All the products would be traded for
something, or else there would be no need to make them. Thus, supply creates its own
demand.
E. Reformulated versions of these classical views are still prevalent among some modern
economists today.
F. The Great Depression of the 1930s was worldwide. GDP fell by 40 percent in U.S. and the
unemployment rate rose to nearly 25 percent (when most families had only one breadwinner).
The Depression seemed to refute the classical idea that markets were self-correcting and
would provide full employment.
G. John Maynard Keynes in 1936 in his General Theory of Employment, Interest, and Money,
provided an alternative to classical theory, which helped explain periods of recession.
1. Not all income is always spent, contrary to Say’s law.
2. Producers may respond to unsold inventories by reducing output rather than cutting
prices.
3. A recession or depression could follow this decline in employment and incomes.
H. The modern aggregate expenditures model is based on Keynesian economics or the ideas
that have arisen from Keynes and his followers since. It is based on the idea that saving and
investment decisions may not be coordinated, and prices and wages are not very flexible
downward. Internal market forces can therefore cause depressions and government should
play an active role in stabilizing the economy.
QUIZ
1. A private closed economy includes:
A. households, businesses, and government, but not international trade.
B. households, businesses, and international trade, but not government.
C. households and businesses, but not government or international trade.
D. households only.
2. The equilibrium level of GDP in a private closed economy is where:
A. MPC = APC.
B. unemployment is about 3 percent of the labor force.
C. consumption equals saving.
D. aggregate expenditures equal GDP.
3. The equilibrium level of GDP is associated with:
A. an excess of planned investment over saving.
B. no unintended changes in inventories.
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Chapter 11 - The Aggregate Expenditures Model
C. an unintended decrease in business inventories.
D. an unintended increase in business inventories.
4. Suppose that the level of GDP increased by $100 billion in a private closed economy where the
marginal propensity to consume is 0.5. Aggregate expenditures must have increased by:
A. $100 billion.
B. $50 billion.
C. $500 billion.
D. $5 billion.
5. If a $10 billion decrease in lump-sum taxes increases equilibrium GDP by $40 billion then:
A. the multiplier is 4.
B. the MPC for this economy is .8.
C. the MPC for this economy is .6.
D. the multiplier is 3.
6. An increase in the investment demand curve will:
A. Shift the investment schedule downward
B. Shift the investment schedule upward
C. Decrease the quantity of investment
D. Decrease the real rate of interest
7. Saving and investment are, respectively:
A. An injection and a leakage
B. A leakage and an injection
C. Wealth and income
D. Income and wealth
8. If GDP exceeds aggregate expenditures:
A. Saving will exceed planned investment
B. Planned investment will exceed saving
C. Planned investment will exceed actual investment
D. Injections will exceed leakages
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Chapter 11 - The Aggregate Expenditures Model
9. Over time, an increase in the real output and incomes of the trading partners of the United States
will:
A. Increase U.S. exports and U.S. imports
B. Decrease U.S. exports and U.S. imports
C. Increase U.S. exports and decrease U.S. imports
D. Decrease U.S. exports and increase U.S. imports
10. The amount by which an aggregate expenditures schedule must shift downward to eliminate
demand-pull inflation and still achieve the full-employment GDP is a(n):
A. Inflationary expenditure gap
B. Recessionary expenditure gap
C. Depreciation rate
D. Price-level change
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