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Chapter 11: Q1. (page 236)

True or False. The aggregate expenditures model assumes flexible prices.

Short Answer

Expert verified

The statement is false.

Step by step solution

01

Step 1. Model of aggregate expenditures

The model of aggregate expenditures determines the national income of an economy through private consumption, gross investment, government purchases, and net exports.

Y = C + Ig+ G + NX

John Maynard Keynes proposed this model after the Great Depression of the 1930s. It was a major criticism of the classical model of income and output and considered the fall of economic activities during the economic depression of the 1930s.

02

Step 2. Reason for false statement

Keynes noticed that during the depression of the 1930s, the price level did not reduce at all during the crisis. Therefore, the demand for the output produced fell significantly, and the supply exceeded the demand for output, causing inflation. Too much money was chasing too little of the output.

Therefore, Keynes proposed the aggregate expenditure model at fixed prices to determine the equilibrium level of output, income, and employment.

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Most popular questions from this chapter

If the multiplier is 5 and investment increases by \(3 billion, equilibrium real GDP will increase by

  1. \)2 billion.

  2. \(3 billion.

  3. \)8 billion.

  4. $15 billion.

Question: If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by _______ taxes or _______ government expenditures.

  1. increasing; increasing

  2. increasing; decreasing

  3. decreasing; increasing

  4. decreasing; decreasing

What is an investment schedule, and how does it differ from an investment demand curve?

True or False. If spending exceeds output, real GDP will decline as firms cut back on production.

Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in a private closed economy?

  1. A decline in the real interest rate.

  2. An overall decrease in the expected rate of return on investment.

  3. A sizable, sustained increase in stock prices.
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