Exam 11: A: The Aggregate Expenditures Model

Explain the relationship between net exports and the following factors: prosperity abroad, tariffs on Canadian exports abroad, depreciation of the Canadian dollar on foreign exchange markets.

The aggregate expenditures model has one over-arching assumption.What is this assumption?

Explain why exports are added to, and imports are subtracted from, aggregate expenditures in moving from a closed to an open economy.

If prices are stuck, how can firms receive feedback from the market to tell them how much to produce?

Why does the inclusion of a lump-sum tax cause domestic consumption to fall initially by an amount less than the tax?

Refer to the following table to answer the questions. (a) Assuming that investment, net exports, government expenditures, and taxes do not change with changes in real GDP, what are the sizes of the MPC, the MPS, and the multiplier? (b) If full employment in this economy is 65 million, will there be an inflationary or recessionary 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 gap? Explain.(c) Will there be an inflationary or recessionary 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 gap? Explain.

What is the effect of net exports, either positive or negative, on equilibrium GDP?

When international trade is considered, explain how net exports could be either positive or negative additions to aggregate expenditures.In which case would the impact of net exports be expansionary? Explain.

Explain the difference between an equilibrium level of GDP and a level of GDP that is in disequilibrium.

Explain how the recession resulting from the financial crisis in the United States in late-2008 was transmitted to Canada.

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.

Keynes developed his theory during the height of the Great Depression (a severe recessionary gap) in the 1930s.What two policy tools did he recommend to close this gap?

Explain the effect of a cut in lump-sum taxes of $40 billion on the economy.Assume that investment, net exports, government expenditures, and taxes do not change with changes in real GDP and the MPC is .75.How does the impact of this change differ from that of a $40 billion increase in government spending?

Explain the effect of an increase in government spending of $50 billion on the economy.Assume that investment, net exports, government expenditures, and taxes do not change with changes in real GDP and the MPC is .75.

At the current level of real GDP, Sa = $180 Ig = $160 X = $300 M = $280 G = $250 T = $270 (a) What is the size of injections? Leakages? (b) Is GDP at its equilibrium level? Explain.(c) What is the unplanned change in inventories? Explain.

Evaluate the statement that "for an open economy the equilibrium GDP always corresponds with an equality of exports and imports."

Answer the following questions using the aggregate expenditures model of the economy described below.C = 100 + .8Yd T = 60 + .25Y Ia = 28 Ga = 48 Xa = 54 M = .1Y (a) What are the marginal propensity to consume, the marginal tax rate, and the marginal propensity to import? (b) What is the saving function? What is the marginal propensity to save? (c) What is the aggregate expenditure function? What is autonomous expenditure? What is the marginal propensity to withdraw? (d) What is the equilibrium level of real GDP? (e) What is the size of the multiplier? (f) Suppose the full employment level of real GDP is $380.Does a recessionary gap or an inflationary gap exist? How can the government eliminate the gap by altering government expenditures?

Explain the difference between planned and actual investment in the economy.Why is the distinction important?

Explain why saving equals planned investment at equilibrium GDP.

Explain why are nations are tempted to use policies of imposing tariffs on imported goods, and devaluating their national currency? Further explain why implementing such policies are huge mistakes?