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Chapter 19: Problem 14

Using the aggregate expenditure-output model, assume the aggregate expenditures \((A E)\) line is above the 45 -degree line at full-employment GDP. This vertical distance is called a (an) a. inflationary gap. b. recessionary gap. c. negative GDP gap. d. marginal propensity to consume gap.

Short Answer

Expert verified
When the aggregate expenditures line is above the 45-degree line at full-employment GDP, it indicates that aggregate demand is greater than aggregate supply, leading to inflationary pressure. Thus, this vertical distance is called an inflationary gap. The correct answer is: a. inflationary gap.

Step by step solution

01

The aggregate expenditure-output model is a macroeconomic model that shows the relationship between aggregate output (real GDP) and aggregate expenditures, which include consumption, investment, government spending, and net exports. The 45-degree line represents a scenario where aggregate output (Y) equals aggregate expenditures (AE). #Step 2: Identify the Scenario#

The exercise states that the aggregate expenditures line is above the 45-degree line at full-employment GDP. In other words, when the economy is at full employment, the total spending by households, firms, and the government is greater than the real GDP. #Step 3: Assess the Implications#
02

When the AE line is above the 45-degree line at full-employment GDP, it indicates that aggregate demand (spending) is greater than aggregate supply (output), leading to inflationary pressure. Firms react to this excess demand by raising their prices, which, in turn, increases inflation. #Step 4: Select the Correct Term#

Having assessed the implications of the scenario, it becomes clear that the vertical distance between the aggregate expenditure line and the 45-degree line represents an inflationary gap. Therefore, the correct answer is: a. inflationary gap.

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Most popular questions from this chapter

If the marginal propensity to consume (MPC) is \(0.90,\) a \(\$ 100\) billion increase in planned investment expenditure, other things being equal, will cause an increase in equilibrium output of a. \(\$ 90\) billion. b. \(\$ 100\) billion. c. \(\$ 900\) billion. d. \(\$ 1,000\) billion.

If the value of the marginal propensity to consume \((M P C)\) is \(0.50,\) the value of the spending multiplier is a. 0.50. b. 1. c. 2. d. 5.

The spending multiplier is defined as a. \(1 /(1-\) marginal propensity to consume). b. \(1 /\) (marginal propensity to consume). c. \(1 /(1-\) marginal propensity to save). d. \(1 /\) marginal propensity to consume \(+\) marginal propensity to save).

Use the aggregate expenditures-output model and assume an economy is in equilibrium at \(\$ 5\) trillion, which is \(\$ 250\) billion below fullemployment GDP. If the marginal propensity to consume \((M P C)\) is \(0.60,\) full- employment GDP can be reached if government spending a. decreases by \(\$ 60\) billion. b. decreases by \(\$ 100\) billion. c. decreases by \(\$ 250\) billion. d. is held constant.

Keynes's criticism of the classical theory was that the Great Depression would not correct itself. The multiplier effect would restore an economy to full employment if a. government would follow a "least government is the best government" policy. b. government taxes were increased. c. government spending were increased. d. government spending were decreased.
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