THE AGGREGATE EXPENDITURES MODEL 105
g. The combined effect of a $10 increase in government purchases and a $10 increase in taxes is to
7. Why does
real GDP bv $
5. Here
is a consumption schedule for a closed econoryy.
lf
$550
$520
560
570
526
532
9. What happens to the aggregate expenditures schedule when net exports increase or decrease?
11. Explain the simplifying assumptions used to include
the public sector in the aggregate expenditures rRodel.
12. Describe how government expenditures affect equi-
580
538
590
544
600
550
13. What effect will taxes have on the consumption
610
556
schedule?
620
562
630
568
14. Explain why, with government taxing and spending,
the equilibrium real GDP is'the real GDp at which real
librium GDP.
value of the multiplier is
planned investment
nominal GDP
is
is $_
$58, the equilibrium
and exceeds full-
employment real GDP by g
a(n)
c. lf
aggregate expenditures model?
10. Give some examples of international economic linkages affecting the domestic level of GDP.
Real GDP
b.
GDp
8. How do exports and imports get included in the
Assume that ihe level of real GDP at which full employment without inflation is achieved is $590.
a. The
the equilibrium level of real
change?
is $_
is $38, the
equilib-
and is less than
full-employment real GDP by $--------.--.------'-.-..-.-.
a(n)
gap of $_
There is
15. Use leakages and injections to explain how changes
in the different components of aggregate expenditures
cause GDP to move to its equilibrium level.
16. Explain what is meant by a recessionary expenditure
expenditure gap of $
planned investment
rium realGDP
There is
GDP equals consumption plus investment plus net exports
plus government purchases of goods and services.
expenditure
gap.
17. What economic conditions contributed to the recessionary expenditure gap in the U.S. economy in 2001 ?
18. What is an inflationary expenditure gap? Why is the
U.S. inflation in the late 1980s an example of an inflationary expenditure gap?
19. Why did the large negative net exports in 2005 not
cause a decline in the U.S. economy below its potential
and substantial unemployment?
r
SHORT ANSWER AND ESSAY OUESTIONS
1. What does it mean that an economy is private and
closed?
20. What are the limitations of the demand aggregate
expenditures model in termsof measurement of the price
level and treat'inent of demand-pull and cost-push inflation? Are there other limitations?
2. What assumptions are made in this chapter about
production capacity, unemployment, and
the
price
level?
3. What is the difference between an investment demand curve and an investment schedule?
4. Why is the equilibrium level of real GDF the level
of rehl GDF at which domestic output equals aggregate
expenditures? What will cause real GDP to rise if it is
below this level, and what will cause it to fall if it is above
this level?
5. Explain what is meant by a leakage and by an injection. Which leakage and which injection are considered
in this chapter? Why is the equilibrium real GDP the real
GDP at which the leakages equal the injections?
6. Why is it important to distinguish between planned
and actual investment in explaining how a private, closed
economy achieves its equilibrium level of real GDP?
ANSWERS
Chapter 9 Tfe Aggregate Expenditures Model
r
FILL-IN QUESTIONS
1. a closed, private, income, increase
2. investment, investment
3. equal to, equal to, 4s-degree
4, a withdrawal from, an addition to, saving, investment
5. less than, decreases, rise
6, greater than, increases, fall
7. equal to, zero
f.
f.
increase, an increase, an increase
increases, decreases, greater, multiplier
10. minus, plus, plus
11. a. *; b. +; c. +; d.
-;
e. +; f. -., g. +
106
12.
13.
14.
15.
16.
17.
18.
19.
20.
CHAPTER 9
PROBLEMS
increase, decrease
lump-sum
consume, save
expenditures, output, plus, plus, plus
investment, exports, saving, imports
less, increase, divided
an inflationary, decrease
demand-pull, cost-push, inflation
demand-pull, beyond, corrects
4,4,
TRUE-FALSE QUESTIONS
p.166
fi. r, P.172
11. F, P.172
2.'r, p.'167
12. T, P.172
3. I p. 167
4. T, pp.168-169 13. F, P.173
14. T, PP. 17T174
5. I p.169
15. T, P.175
6. F, p.169
16. F, P. 175
7. F, p.171
17. F,P.l75
8. T, p.171
18. T, PP. 176-177
9. T, p.171
1. T,
19.
I
20. T, pp.17&-179
21. F, p.179
22. F,p.179
23. T, pp. 17+-180
24.
25.
F, p.
F,
1'83
1,. b,
p.166
10. c, PP.167-168
f
10
p. 178
s
p.183
MULTIPLE-CHOICE QUESTIONS
11. b, P.172
2. c, p.167
3; c, pp.168-170 12. a,P.173
4. b, pp.168-170 13. b, PP. 173-174
Q. d, pp. 168-170 14. c, PP. j73-'174
15. a, P.175
6. a, p.171
16' d, P. 175
7. c; p.171
17. d, P.175
8. c, p.17'l
18. c, P.174
9. b, p. 171
b. constant (given); c. (1)unrelated, (2) directly
related; d. decrease, downward
2. a. In:22,22,22,22,22,22,22; C + ln:'|.328,1336, 1344,
1.q52, 1360, 1368, 1376; Ut: -8,
-2, O, +2, +4; b. 1360;
c. 0.8, 0.2; d. 5; e. increase, 3, increase;.,15; decrease,
4, decrease, 20
3. a. $4 (and put $4 in each of the seven net exports values in
the table); b. $780,820,860,900,940,980, 1020; c. $900; d.5;
e. (1) increase, $50, (2) decrease, $50
4* a. 0.9, 90, Cr;1160, 1250, 1340, 1430, 1520, 1610, 17OO; b.
C"+ Ig+ Xn+ G:1510, 1600, 1690, 1780, 1870, 1960,2050; c'
1600; d. plot graph; e. rise, 100; f. fall, 90; 9. raise,
5. a.2.5; b.620,30, inflationary 12;c.57O,20, recessionary 8
1. a. investment;
19. c, pp.176-177
20. c, pp.176-177
21. b, pp.176-177
22. c,p.179
23. c, p.179
24. q,pp.179-180
25. b, p.183
--\
SHORT ANSWER AND ESSAY OUESTIONS
p.167
8. pp.17F174 15. P.179
p.167
9. pp.173-174 16. P.179
17. PP.180-181
p.167
10. P.175
pp.168-170 11. pp.175-176 {8. pp.1.7ts180
12. pp,1.7F177 19. P.18'l
5. p.171
19. pp.1T7-1v9 20. P.183
6. p.171
14. pp.17&-179
7. p.172
1.
2.
3.
4.
AGGREGATE DEMAND AND AGGREGATE
6. Why is the aggregate supply curve in the long run
a vertical curve? Why is output not affected by the price
level in the long run?
7. Why does the short-run aggregate supply curve slope
upward?
8. Why does a change in the degree of market power
affect aggregate supply?
9, Describe how changes in the international economy
inlluence aggregate demand or aggregate supply.
10. How does an increase
or decrease in per-unit produc-
tion costs change aggregate supply? Give examples.
11. How does the legal and institutional environment af-
f.
SUPPLY 117
increase, increase, increa'se
10. supplied, increases, decreases, positive
11. increase, decrease
12. a. (1) domestic resource availability, (2) prices of imported
resources, (3) market power (any order for
l-e;
b. productivity;
c. (1) business taxes and subsidies, (2) government regulation
(either. order
lor
1-21
13. intersection, equal to, accept, pay
14. less than, shortage
15. greater than, surplus
16. increase, increase, demand-pull
17. decrease, recession, rises
18. downward, contracts, efficiency, minimum, costs, price
19. decrease, increase, cost-push
20. increase, decrease, increase, offsets
fect aggregate supply? Give examples.
12. Explain how a change in business taxes affects ag-
gregate demand and aggregate supply.
13. What real domestic output is the equilibdum real domestic output? What will happen to real output if the price
level is below equilibrium?
14. What are the effects on the real domestic output and
the price level when aggregate demand increases along
the aggregate supply curve?
15. What is the relationship between the effect of an increase in aggregate demand on real GDp and the rise in
the price level that accompanies it? Discuss this in terms
of the multiplier effect.
16. lf prices were as flexible downward as they are upward, what would be the effects on real domesiic output
and the price level of a decrease in aggregate demand?
17. Give reasons why prices in the economy tend to be
inflexiblein a downward direction in the horizontal range
of aggregate supply.
18. What are the effects on the real domestic output apd
the price level of a decrease in aggrelate supply?
19. How does an increase in aggregate supply affect the
price level and real output?
20. Explain why rises in oil prices lost their strong inflationary effects on the U.S. economy since the mid-1970s
(Last Word).
TRUE-FALSE QUESTIONS
p.188
10. F, pp.188,
189
189
6. F, p.189
7. T, p.189
8. E p. 189
9. I p. 191
13. T, p. 192
14. I p.199
15. T, p. 195
16. T, p.195
1.
F,
190
19. T, pp. 196_197
2.F,pp.188-189 11. F, p.190
20. E pp.197_197
3. T, p.189
12. F, pp.191-192 21. F, pp. 192_198
4.
F, p.
s.
F, p.
'tz. T, p. 19s
22. T, pp.198_199
23.
F, p.199
24. T, pp. 199_2OO
25. T, pp. 2OO,2O2
18. T, p.196
MULTIPLE-CHOICE QUESTIONS
1. b, p.188
2. a, p.189
3. d, p. 189
4- d, p.190
s.
6.
7.
8.
9.
10. a, p.195
11. a, p.195
12. c, p.195
13. d, p.195
c, pp.19'l-192 14. b, p.196
b, p..192
15. c, pp. 195-196
c, p. 192
16. c, p. 196
b, p.193
17. b, p.196
a, pp. 194-195 18. b, pp.196-197
19. c, pp. aOO,aOI
20. d, pp.196_197
21. c, pp.197_198
22. d, p.199
23. b, p.199
24. c, pp.199_2OO
25. c, pp. 2OO,2O2
PROBLEMS
1. b. (1) 1700,175, (2) 2000, 225, (3) 1OOO, 125
2. a. S, D, l, D; b. I, S, t, t; c. D, S, D, D; d. l, t, u, t; e.
I,D,U
D,
3. a.5, 5, 5; b.2.5,2.5,2.5; c. $3, $3, $3; d. gO, $6, $6, decrease;
e. $2, $2, $2, it will increase
4. a. 1840,100, 1940, 120; b.2SOO,18O, 2350, 190; c. 2390,
200,2490,240
ANSWERS
Chapter 10 Aggregate Demand and Aggregate Supply
FILL-IN QUESTIONS
1. output, price
2. demanded, negative
3. downward, real-balances, interest, foreign
4. decreases, increases
5. movement along, aggregate demand
6.
a. consumer wealth; b. consumer expectations; c. household
d personal taxes (any order for a-@
debt;
7, a. interest rates; b. expected returns on investment (either
order for a-b)
f.
increase, decrease
SHORT ANSWER AND ESSAY QUESTIONS
1. p.188
2. pp.188-189
3. p.190
4. pp.190-191
5. pp.191-192
6. p.192
7. p.193
8. p.195
9. pp.191, 194
10.
11.
12.
13.
14.
p.195
pp.195-196
pp.195--196
p.196
pp.196-197
pp.196-198
pp.198-199
p.199
pp.199-200
pp.200, 201
2O. p.2o1
15.
16.
17.
18.
19.
94
CHAPTER 8
11. What is the difference between a change in the
amount consumed and a change in the consumption
schedule? Explain your answer using a graph'
16. durability, inegularity, variability, variability
17. divided, multiPlied
18. increase, decrease
19, save, consume
12. Are consumption and saving schedules relatively
20. larger, smaller
stable? ExPlain.
13. Discuss the marginal cost and marginal benefit of an
investment decision. How are the marginal cost and the
marginal benefit of investment measured?
14. Draw an investment demand curve' Use it to explain
why investment spending tends to rise when the real rate
of interest falls, and vice versa.
15. ldentify and explain how five noninterest determi-
nants of investment spending can increase or decrease
the amount of investment. lllustrate the changes with
a graph.
16. Why does the level of investment spending tend to
be highly unstable? State four reasons'
17. What is the multiplier effect? Give an equation and
an examPle to show how it works'
18. State the rationale for the multiplier effect'
19. How is the multiplier effect related to the marginal
propensities? Explain in words and equations'
20. How large is the actual multiplier effect? Explain the
reasons for the difference between the textbook example of
the multiplier and the actual multiplier for the economy'
TRUE-FALSE QUESTIONS
19' F, P' 158
10. T, P. 151
p.147
20' T, p' 158
147-148 11. T, p.152
21' F' pp' 158-159
12-T,p-152
S. r, p. t+z
22'T,pp' 158-159
+. r,'pp 148-149 13. T, p.153
T, p' 161
23'
pp.153-154
'147-148
F,
14'
5. T, pp
24' T' p' 161
6. F, pp 148-149 15' T, p.156
25' F pp'161-162
16. F, p.155
z. r, p. tso
17- F'P' 157
S. T, p. 150
18. I PP.157-158
9. F, p.151
1.
F,
2. T, pp.
MULTIPLE.CHOICE QUESTIONS
10' d, p. 151
1. c, p.1'47
'11. b, P.150
2. d, p.148
12. c, pp.150-151
p.148
3. a,
q. b, p. 150
13. a, p. 151
14' b, p.151
5. d, p.150
15. c, p.151
6. c, p.150
16. c, pp.151-152
7. a, p.151
8. c, pp. 148-149 17- c' P.152
9. c, pp. '148_149 18' b' PP. 154-155
19- d' pp' 156-157
20' d' P' 156
21' c, pp' 157-158
22' d, pp' 158-159
23' a' pp' 158-159
24' b' pp' 158-159
25' c, pp' 158-159
PROBLEMS
ANSWERS
Chapter 8 Basic Macroeconomic Relationships
1. a. S: -40, -20,0,20,40,60, 80, 100; APC: 1'000' 0'970'
0.955; APS: O.OOO, O.O3O, 0.045; b' 17OO; c' 80, 100' '8; d' 20'
100, .20; e. (1) .8, MPC, (2) .2, MPS
-; f. none; g' -; h' '
d.100, 150,210,280; f inverse'
c.30,60;
3. a.O,10;b.2Q,30;
2. a. -; b.
FILL.IN OUESTIONS
1. consume, save .,
2. directly, larger, smaller, smaller, larger, equal to
3. rise, fall
4. 1, .10
5, consumption, income
5. saving, income
*;
c.
-i
d. +; e.
(1) decrease, (2) increase; g. (1) lower, (2) raise; h' investment-
demand
c.*; d. +; e. -i f. -i g. -; h' +; i' 5. Change in income:8.00, 6.40, 5.'12,4'10,50; Change in consumption: 8.00, 6.40, 5'12,4J0,3'28, 40.00; Change in saving:
4. a. *; b. -;
2.00, 1 .60, 1 .28, 1 .O2, 0.82, 10.00
7. 1, .25
8. consumption, saving
9, a. wealih; b. expectations; c. real interest rate; d' level of
.
household debt (any order lor a-d)
10. upward, downward, income
11. return, interest
12. benefit, cost
13, increase, decrease
14, inverse, demand, decrease, increase
15. a. the cost of acquiring, maintaining, and operating capital
goods; b. business taxes; c. technological change; d' the stock ot
Iapitai goods on hand; e. Expectations (any order a'c)
SHORT ANSWER AND ESSAY QUESTIONS
1.
2.
p.147
p.147
3.
4.
pp.148-149
pp.14&-149
s.
p.
6.
7.
tsO
p.150
p.150
8. P.151
9. pp. 151-152
p.152
p.152
12. P.152
10.
11'
13. pp.153-154
14. PP.153-155
15' P' 156
16' pp' 157-158
17' pp' 158-159
18' pp' 159' 161
19' P' 161
20' pp' 161-162