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Chapter 23: Problem 11

(Related to the Don't Let This Happen to You on page 800) Briefly explain whether you agree with the following argument: "The equilibrium level of GDP is determined by the level of aggregate expenditure. Therefore, GDP will decline only if households decide to spend less on goods and services."

Short Answer

Expert verified
Disagree. While household spending is a substantial part of aggregate expenditure, it's not the sole determining factor. A decline in GDP can occur due to reduced business investment, decreased government spending, or lower net exports, even when household spending is constant.

Step by step solution

01

Understanding Aggregate Expenditure and GDP

Aggregate expenditure refers to the total spending on goods and services at every level within an economy during a specified time period, and includes household consumption, business investment, government spending, and net exports. GDP, on the other hand, is a comprehensive measure of a nation’s overall economic activity and is the total market value of all final goods and services produced in an economy within a specified period.
02

Analyzing the relationship between Aggregate Expenditure and GDP

In an economy, if the aggregate expenditure is equal to the GDP, then the economy is considered to be in equilibrium. So, it can be said that the aggregate expenditure determines the equilibrium level of GDP under the assumption that other factors are held constant.
03

Implications beyond Household Spending

While household consumer spending is a major portion of aggregate expenditure, it's not the only component. Business investments, government spending, and net exports are also key parts of aggregate expenditure. Therefore, a decline in GDP can occur even if households maintain their spending level, but if there's a significant decrease in any of the other components.

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Most popular questions from this chapter

Explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve is downward sloping.

What is the difference between aggregate expenditure and consumption spending?

(Related to Solved Problem 23.4 on page 807 ) Use the information in the following table to answer the questions. Assume that the values represent billions of 2009 dollars. $$ \begin{array}{r|r|r|r|r} \hline \begin{array}{c} \text { Real } \\ \text { GDP } \\ (Y) \end{array} & \begin{array}{c} \text { Planned } \\ \text { Consumption } \end{array} & \begin{array}{c} \text { Investment } \\ \text { (C) } \end{array} & \begin{array}{c} \text { Government } \\ \text { Purchases } \end{array} & \begin{array}{c} \text { Net } \\ \text { Exports } \end{array} \\ \hline \$ 8,000 & \$ 7,300 & \$ 1,000 & (G) & (N X) \\ \hline 9,000 & 7,900 & 1,000 & 1,000 & -\$ 500 \\ \hline 10,000 & 8,500 & 1,000 & 1,000 & -500 \\ \hline 11,000 & 9,100 & 1,000 & 1,000 & -500 \\ \hline 12,000 & 9,700 & 1,000 & 1,000 & -500 \\ \hline \end{array} $$ a. What is the equilibrium level of real GDP? b. What is the MPC? c. Suppose net exports increase by \(\$ 400\) billion. What will be the new equilibrium level of real GDP? Use the multiplier formula to determine your answer.

Does a change in the price level cause a movement along the aggregate expenditure line or a shift of the aggregate expenditure line? Does a change in the price level cause a movement along the aggregate demand curve or a shift of the aggregate demand curve?

In the aggregate expenditure model, why is it important to know the factors that determine consumption spending, investment spending, government purchases, and net exports?
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