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Which of the following is NOT a simplifying assumption used in the Keynesian aggregate expenditures model as presented in the content?
Which of the following is NOT a simplifying assumption used in the Keynesian aggregate expenditures model as presented in the content?
What is the main reason for the simplification that all savings are by households in the Keynesian aggregate expenditures model as described in the content?
What is the main reason for the simplification that all savings are by households in the Keynesian aggregate expenditures model as described in the content?
The content states that GDP is equal to NI, PI, and DI in the simplified model. What does this imply about factors like indirect taxes, subsidies, and depreciation?
The content states that GDP is equal to NI, PI, and DI in the simplified model. What does this imply about factors like indirect taxes, subsidies, and depreciation?
What is the main difference between 'investment demand' and the 'investment' component of Aggregate Expenditures (AE) in the context of the content provided?
What is the main difference between 'investment demand' and the 'investment' component of Aggregate Expenditures (AE) in the context of the content provided?
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According to the content, why is the government sector ignored in the simplified Keynesian aggregate expenditures model?
According to the content, why is the government sector ignored in the simplified Keynesian aggregate expenditures model?
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At what level of Real Domestic Output and Income (GDP=DI) is the equilibrium level of GDP achieved?
At what level of Real Domestic Output and Income (GDP=DI) is the equilibrium level of GDP achieved?
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When GDP = $430 billion, what is the value of aggregate expenditures?
When GDP = $430 billion, what is the value of aggregate expenditures?
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When GDP = $470 billion, what is the difference between aggregate expenditures and Real Domestic Output?
When GDP = $470 billion, what is the difference between aggregate expenditures and Real Domestic Output?
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If Government Purchases increased from $20 billion to $30 billion, what would the new equilibrium level of GDP be?
If Government Purchases increased from $20 billion to $30 billion, what would the new equilibrium level of GDP be?
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What is the value of planned investment (Ig) at the equilibrium level of GDP?
What is the value of planned investment (Ig) at the equilibrium level of GDP?
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What is the relationship between the change in real domestic output and income (GDP=DI) and the change in aggregate expenditures?
What is the relationship between the change in real domestic output and income (GDP=DI) and the change in aggregate expenditures?
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What is the multiplier effect?
What is the multiplier effect?
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Explain what happens to equilibrium GDP when there is an increase in government purchases.
Explain what happens to equilibrium GDP when there is an increase in government purchases.
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At what level of real GDP will the economy be in equilibrium?
At what level of real GDP will the economy be in equilibrium?
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If the real GDP was 390 billion, what would happen to the level of employment, output, and income?
If the real GDP was 390 billion, what would happen to the level of employment, output, and income?
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What is the relationship between the level of investment and the level of real GDP?
What is the relationship between the level of investment and the level of real GDP?
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What is the relationship between the level of saving and the level of real GDP?
What is the relationship between the level of saving and the level of real GDP?
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What is the relationship between aggregate expenditures and the level of real GDP?
What is the relationship between aggregate expenditures and the level of real GDP?
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If unplanned changes in inventories are negative, what does that indicate about the level of aggregate expenditures relative to real GDP?
If unplanned changes in inventories are negative, what does that indicate about the level of aggregate expenditures relative to real GDP?
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What is the relationship between the level of real GDP and the level of employment?
What is the relationship between the level of real GDP and the level of employment?
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When aggregate expenditures exceed real GDP, what happens to unsold goods?
When aggregate expenditures exceed real GDP, what happens to unsold goods?
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What is the key determinant of the equilibrium level of real GDP in this model?
What is the key determinant of the equilibrium level of real GDP in this model?
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What will happen to the equilibrium level of real GDP if the level of investment increases?
What will happen to the equilibrium level of real GDP if the level of investment increases?
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What is the relationship between household income and Gross Domestic Product (GDP)?
What is the relationship between household income and Gross Domestic Product (GDP)?
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What is the role of investment (Ig) in equilibrium GDP?
What is the role of investment (Ig) in equilibrium GDP?
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What is the significance of the 45-degree line in the aggregate expenditures model?
What is the significance of the 45-degree line in the aggregate expenditures model?
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What happens to equilibrium GDP when investment decreases by 5 billion dollars?
What happens to equilibrium GDP when investment decreases by 5 billion dollars?
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How does international trade impact aggregate expenditures and equilibrium GDP?
How does international trade impact aggregate expenditures and equilibrium GDP?
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What is the impact of a positive net export schedule (Xn1) on equilibrium GDP?
What is the impact of a positive net export schedule (Xn1) on equilibrium GDP?
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Which of the following factors can cause prosperity abroad to increase exports?
Which of the following factors can cause prosperity abroad to increase exports?
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How can a country try to increase exports through exchange rate manipulation?
How can a country try to increase exports through exchange rate manipulation?
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What is a potential consequence of a country implementing tariffs on imported goods?
What is a potential consequence of a country implementing tariffs on imported goods?
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What is the main idea behind the statement 'Saving equals planned investment'?
What is the main idea behind the statement 'Saving equals planned investment'?
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In the context of this content, what is the significance of 'no unplanned changes in inventories'?
In the context of this content, what is the significance of 'no unplanned changes in inventories'?
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Why is it important to include net exports in aggregate expenditures?
Why is it important to include net exports in aggregate expenditures?
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What is the relationship between the level of GDP and net exports?
What is the relationship between the level of GDP and net exports?
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What is the main factor that determines if net exports are positive (Xn1) or negative (Xn2)?
What is the main factor that determines if net exports are positive (Xn1) or negative (Xn2)?
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What is the equilibrium level of GDP when government purchases are $20 billion?
What is the equilibrium level of GDP when government purchases are $20 billion?
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What is the value of disposable income when real GDP is $450 billion?
What is the value of disposable income when real GDP is $450 billion?
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What is the value of aggregate expenditures when real GDP is $470 billion?
What is the value of aggregate expenditures when real GDP is $470 billion?
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What is the size of the recessionary expenditure gap when aggregate expenditures are $490 billion and full-employment GDP is $530 billion?
What is the size of the recessionary expenditure gap when aggregate expenditures are $490 billion and full-employment GDP is $530 billion?
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If the government increases spending by $25 billion, what is the predicted change in equilibrium GDP?
If the government increases spending by $25 billion, what is the predicted change in equilibrium GDP?
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What is the value of the multiplier when the change in equilibrium GDP is $50 billion and the change in government spending is $25 billion?
What is the value of the multiplier when the change in equilibrium GDP is $50 billion and the change in government spending is $25 billion?
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What is the main economic idea of Say's Law?
What is the main economic idea of Say's Law?
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What is a major difference between classical and Keynesian economics?
What is a major difference between classical and Keynesian economics?
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Which of these is NOT a characteristic of Keynesian economics?
Which of these is NOT a characteristic of Keynesian economics?
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What is the difference between a recessionary expenditure gap and an inflationary expenditure gap?
What is the difference between a recessionary expenditure gap and an inflationary expenditure gap?
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What is the main economic policy implication of Keynesian economics?
What is the main economic policy implication of Keynesian economics?
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According to Say's Law, what is the primary determinant of the value of goods and services?
According to Say's Law, what is the primary determinant of the value of goods and services?
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Which of these is NOT a characteristic of the recession of 2007-09?
Which of these is NOT a characteristic of the recession of 2007-09?
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What were the two main Keynesian policies implemented by the federal government during the recession of 2007-09?
What were the two main Keynesian policies implemented by the federal government during the recession of 2007-09?
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What is the most likely impact of a $15 billion decrease in consumption spending on equilibrium GDP?
What is the most likely impact of a $15 billion decrease in consumption spending on equilibrium GDP?
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What would be the most likely impact of a $20 billion increase in taxes on equilibrium GDP?
What would be the most likely impact of a $20 billion increase in taxes on equilibrium GDP?
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Study Notes
Aggregate Expenditures Model
- The model focuses on the relationship between aggregate expenditures and real GDP in a closed economy.
- Assumptions include fixed prices, zero depreciation and net factor income from abroad, and ignoring government and foreign sectors. In this simplified model, savings are solely by households, meaning GDP equals national income, personal income, and disposable income.
- In a private closed economy, aggregate expenditures are equal to consumption (C) plus investment (Ig).
- Equilibrium GDP occurs when aggregate expenditures equal real GDP. At equilibrium:
- Quantity of goods produced equals the quantity purchased.
- There is no incentive for firms to change production levels.
- No unplanned changes in inventories.
Equilibrium GDP
- Real GDP is equal to aggregate expenditures in equilibrium.
- Aggregate expenditures equal Consumption (C) + planned Investment (Ig).
- The model assumes a simple relationship: spending equals output.
- The level of equilibrium GDP is unique.
Model Simplifications
- Investment demand curve is downward sloping. Investment demand is affected by the real interest rate (r) and real GDP.
- Investment Demand Schedule shows a horizontal line representing the fixed investment, which is independent of GDP.
Changes in Equilibrium GDP
- Changes in investment spending can create a multiplier effect on equilibrium GDP. An increase in investment leads to an increase in GDP, and vice-versa.
Adding International Trade
- Include net exports (spending) as part of aggregate expenditures.
- Exports add to production, employment, and income.
- Imports reduce spending.
- Net exports (Xn) can be positive or negative, depending on whether exports are greater than imports or vice versa.
The Net Export Schedule
- The schedule shows how net exports (Xn) change with changes in GDP. Net exports remain constant for a range of GDP.
International Economic Linkages
- Foreign prosperity can affect domestic exports.
- Exchange rate changes can influence exports and imports.
Adding the Public Sector
- Government purchases increase aggregate expenditures.
- Taxes reduce disposable income and have a partial offsetting effect on equilibrium GDP.
- Balance budget multiplier = 1.
Taxation and Equilibrium GDP
- Taxes reduce disposable income.
- Consumption spending falls.
- Equilibrium GDP decreases.
Equilibrium versus Full Employment
- Recessionary expenditure gap: Insufficient aggregate spending, GDP is below the full-employment level. A negative GDP gap means the economy is operating below full capacity.
- Inflationary expenditure gap: Too much spending, exceeding the full-employment GDP. Demand-pull inflation occurs when spending exceeds the economy's production capacity.
- Recessions occur due to a decline in aggregate expenditure that leads to a negative GDP gap.
- Expansionary gaps occur due to an increase in aggregate expenditure that leads to an inflationary gap.
Application: The Recession of 2007–2009
- The recession started in December 2007 and had declines in consumption and investment spending.
- The federal government implemented Keynesian policies.
- Economic stimuli and government intervention included tax rebate checks and a $787 billion stimulus package.
Say's Law, Great Depression, Keynes
- Classical economics focused on the supply side; Say's Law suggested supply creates demand, and the economy self-corrects.
- Contrasting views with the Keynesian perspective, which emphasizes demand, and government intervention to manage macroeconomic instability.
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Description
Test your understanding of the Aggregate Expenditures Model, focusing on the relationship between aggregate expenditures and real GDP in a closed economy. This quiz covers concepts like equilibrium GDP, consumption, and planned investment, emphasizing the assumptions and outcomes of the model.
