schedule caused by changes in expected rates of return or changes in interest

Schedule caused by changes in expected rates of

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schedule (caused by changes in expected rates of return or changes in interest rates) shifts the aggregate expenditures curve and causes a new equilibrium level of real GDP. Real GDP changes by more than the amount of the initial change in investment. This multiplier effect (GDP/Ig) accompanies both increases and decreases in aggregate expenditures and also applies to changes in net exports (Xn) and government purchases (G).7 The net export schedule in the model of the open economy relates net exports (exports minus imports) to levels of real GDP. For simplicity, we assume that the level of net exports is the same at all levels of real GDP.8. Positive net exports increase aggregate expenditures to a higher level than they would if the economy were “closed” to international trade. Negative net exports decrease aggregate expenditures relative to those in a closed economy, decreasing equilibrium real GDP by a multiple of their amount. Increases in exports or decreases in imports have an expansionary effect on real GDP, while decreases in exports or increases in imports have a contractionary effect.9.Government purchases in the model of the mixed economy shift the aggregate expenditures schedule upward and raise GDP.10.Taxation reduces disposable income, lowers consumption and saving, shifts the aggregate expenditures curve downward, and reduces equilibrium GDP.11. In the complete aggregate expenditures model, equilibrium GDP occurs where Ca + Ig + Xn + G = GDP. At the equilibrium GDP, leakages of after-tax saving (Sa), imports (M), and taxes (T) equal injections of investment (Ig), exports (X), and government purchases (G): Sa + M + T = Ig + Xn + G. Also, there are no unplanned changes in inventories.12.The equilibrium GDP and the full-employment GDP may differ. A recessionary expenditure gap is the amount by which aggregate expenditures at the full-employment GDP fall short of those needed to achieve the full-employment GDP. This gap produces a negative GDP gap (actual GDP minus potential GDP). An inflationary expenditure gap is the amount by which aggregate expenditures at the full-employment GDP exceed those just sufficient to achieve the full-employment GDP. This gap causes demand-pull inflation.13.Keynes suggested that the solution to the large negative GDP gap that occurred during the Great Depression was for government to increase aggregate expenditures. It could do this by increasing its own expenditures (G) or by lowering taxes (T) to increase after-tax consumption expenditures (Ca) by households. Because the economy had millions of unemployed
workers and massive amounts of unused production capacity, government could boost aggregate expenditures without worrying about creating inflation.14.The stuck-price assumption of the aggregate expenditures model is not credible when the economy approaches or attains its full-employment output. With unemployment low and excess production capacity small or nonexistent, an increase in aggregate expenditures will cause inflation along with any increase in real GDP. Chapter 12:Aggregate demand-

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