SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.62) Explain, in detail, how the adjustment to macroeconomic equilibrium occurs whenspending is less than production. Be sure to discuss how inventories play a crucial rolein the adjustment process. State what happens to GDP and employment during theadjustment process.62)Answer: If spending is less than production, then firms will not be selling as many goodsand services as they had expected. Inventories of goods will start to build up.This sends a signal to those managing the retail firms to cut back on orders ofgoods from their distributors. Distributors cut back purchases frommanufacturers. Manufacturers of the goods will cut back on production of thegoods, and reduce purchases from their suppliers and lay off workers. Thereduction in production will continue until inventories equal their desired levels,or until spending equals production. If this happens across many differentindustries, GDP and total employment will decline.Page Ref: 774-775/392-393Learning Outcome: Macro-8: Investigate the relationship between income and expenditures.63) What are inventories? What usually happens to inventories at the beginning of arecession, and what usually happens to inventories at the beginning of an expansion?63)Answer: Inventories are goods that have been produced but not yet sold. Inventories riseat the beginning of a recession and fall at the beginning of an expansion.Page Ref: 773/391Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures.64) Why do economists care about aggregate expenditures?64)Answer: Increases and decreases in aggregate expenditures cause the year-to-yearfluctuations in GDP. Economists devote considerable time and energy toforecasting what will happen to each component of aggregate expenditure. If theyforecast aggregate expenditures will decline in the future, this is equivalent tosaying that GDP will decline and the economy will enter into a recession. Thismeans fewer job opportunities, lower wages, and lower profits.Page Ref: 774-775/392-393Learning Outcome: Macro-8: Investigate the relationship between income and expenditures.12
65) What is the main reason for changes in GDP in the short run?65)Answer: The main reason for changes in GDP in the short run is changes in the level ofaggregate expenditure.Page Ref: 772/390Learning Outcome: Macro-2: Explain the relationship between expenditure and income.66) Into which category of aggregate expenditure would each of the following transactionsfall?
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