Question

Answer the following questions, which relate to the aggregate expenditures model: Instructions: Enter your answer as a whole number. a. Given the following: Ca = $120, Ig = $60, Xn = − $10, and G = $30, what is the economy’s equilibrium GDP? b. If real GDP in an economy is currently $230, will the economy’s real GDP rise, fall, or stay the same? c. Suppose that full-employment (and full-capacity) output in an economy is $230. If Ca = $170, Ig = $60, Xn = − $10, and G = $30, what will be the macroeconomic result?

Answer 1

Answer:

A. $200

B. Fall

C. Inflationary expenditure gap and employment levels are higher than the full employment level.

Explanation:

A. Equilibrium occurs where real output (Y) equals aggregate expenditures (AE), where AE = C + Ig+ G +Xn.

Therefore the equilibrium value is:

Y = AE = C + Ig+ G +Xn

= $120 + $60 +(-$10) +$30 = $200

B. If real GDP is $230 and the aggregate expenditures of $200 will result in positive unplanned inventory investment which means GDP will fall as firms respond to the inventory build-up by reducing output.

C. C + Ig+ G +Xn

$170 + $60 + (−$10) +$30 =$250

Therefore since full-employment and full-capacity output in the economy is $230 there is an inflationary expenditure gap and employment levels are higher than the full employment level.