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Chapter 23: Problem 3

Which of the following does the aggregate expenditure model seek to explain: long-run economic growth, the business cycle, inflation, or cyclical unemployment?

Short Answer

Expert verified
The Aggregate Expenditure Model seeks to explain 'the business cycle'.

Step by step solution

01

Understand the Aggregate Expenditure Model

First, it is necessary to grasp the basics of the Aggregate Expenditure Model. This is a macroeconomic concept depicting the total spending (consumption, planned investment, government purchases and net exports) in an economy. It's a tool designed primarily to analyze short-term fluctuations in the country's economic activities.
02

Match the Concept with the Phenomena

Next, we need to align this understanding with the four phenomena mentioned: long-run economic growth, the business cycle, inflation, and cyclical unemployment. By its nature and purpose, the Aggregate Expenditure Model directly pertains to the business cycle, as it's a tool to explain short run fluctuations in the economy. It helps predict changes in total output and income.
03

Finalize the Answer

Based on this analysis, it becomes clear that the Aggregate Expenditure Model seeks to explain 'the business cycle', rather than long-term economic growth, inflation, or cyclical unemployment. It's mainly focused on short-term changes in the economy, which correlate directly with twists and turns of the business cycle.

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Most popular questions from this chapter

Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or less over the business cycle than it would in the absence of unemployment insurance? Briefly explain.

What is the key idea in the aggregate expenditure macroeconomic model?

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

An \(M P C\) equal to 0 implies a multiplier of 1 , meaning that \(\$ 1\) increase in autonomous expenditures would increase real GDP by only \(\$ 1 .\) Why does an \(M P C\) equal to 0 result in no multiplier effect? Conversely, an MPC equal to 1 implies an infinite multiplier, meaning that a \(\$ 1\) increase in autonomous expenditures would increase real GDP by an infinite amount. Why does an \(\mathrm{MPC}\) of 1 result in an infinite multiplier? Explain your answers using the logic of the multiplier process.

A Federal Reserve publication noted that "the shedding of unwanted inventories often accounts for a large portion of the decline in gross domestic product (GDP) during economic recessions." What does the author mean be "shedding of unwanted inventories"? What makes the inventories unwanted? Why would shedding inventories lead to a decline in GDP?
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