Writing during the Great Depression, Keynes naturally focused on problems ofunemployment.The equilibrium level of GDP is the level at whichaggregate demand equals output.At the equilibrium level of income it must be true that totalincome equals total spending.Using the standard 45-degree line diagram, how does a decrease in net exports effect the expenditure schedule?It shifts the expenditure schedule downward.A major reason for the existence of inflationary and deflationary gaps is thatsaving and investing are done by different groups.A rising price level should shift the expenditure scheduledownward and decrease equilibrium real GDP.In the income-expenditure model, at equilibrium GDPeither unemployment or inflation may occur.If net exports decrease, the expenditure schedule willshift downward.45° line diagrams show howexpenditures vary with income.Economists before Keynes assumed that equilibrium GDP occurredautomatically.The underlying cause of inflation isincreasing aggregate demand."Stagflation" refers to the unwelcome combination ofinflation and unemployment.Self correcting mechanism reveals thatin the long run economy will be in equilibrium at potential GDP.Recessionary gap arises whenthere is less spending than desired.If aggregate quantity supplied exceeds aggregate quantity demanded, we can expect an unplannedaccumulation of inventories, causing firms to lower prices.An economist who claims that an increase in government spending would result mainly in a higher price level believes the economy is operating whereaggregate supply curve is steep.To calculate a firm's per unit of output profit, it is necessary to subtractcost per unit from product price.For most firms in the economy, the largest part of factor costs is the cost oflabor.The aggregate demand and aggregate supply curve intersectat a point which may or may not be equal to potential GDP.Increases in productivity are caused byhigher levels of literacy, better education and training of the labor force, and improvements in technology.At levels of output close to full employment, the aggregate supply curve is probablyvery steep.How is it possible for the economy to have an inflationary gap?Equilibrium is at a GDP level above full employment.The aggregate supply curve shows the relationship between ____ and ____, holding all other factors constant.price level; quantity of real GDP suppliedThe concept of aggregate supply refers to aschedule of output.Many economists describe the 2007-2009 period in the United States as being a condition of a(n)recessionary gap.The general shape of the aggregate supply curve isupward sloping.An increase in wages will cause the aggregate supply curve toshift inward.The main reason that firms adjust their output when the price level changes is thattheir profit margins change.If resource prices are fixed and the selling price rises, thenprofits will increase.Economists generally assume that there is a short-run trade-off betweeninflation and unemployment."Fiscal Policy" is the federal government's plan forspending and taxes, designed to influence the level of aggregate demand.To eliminate an inflationary gap, the aggregate demand curve shouldshift inward.Why does a tax change affect aggregate demand?A tax change alters disposable income and consumption spending.If the federal government increases the amount of Social Security benefits for retired persons, then theconsumption schedule will shift upward, effect on equilibrium GDP will be the same as a cut in taxes, and aggregate demand curve will shift outward.A "liberal" would most likely argue in favor ofspending increases when fiscal expansion is necessary, and tax increases when fiscal restraint is necessary.Assume that the federal government wishes to counteract inflation with a policy that has the smallest impact on the federal budget. Which of the following would you recommend?Decrease government purchases.In an effort to balance the budget, the government cuts spending rather than increasing taxes. What will happen to the consumption schedule?It will shift downward.A "conservative" would most likely argue in favor oftax cuts when fiscal stimulus is necessary, and spending cuts when fiscal restraint is necessary.Congress is debating whether to raise taxes by $100 billion or decrease spending by $100 billion in order to eliminate a budget deficit. Which action will have the larger effect on equilibrium GDP?the decrease in spendingAssume that the government is considering different policies to increase total expenditures in order to reduce unemployment. Which of the following would achieve this objective?increasing transfer payments, decreasing taxes, and increasing government spendingIn 2000, many economists believed that the most serious macroeconomic problem confronting the U.S. economy was an inflationary gap. Which policies would be effective in dealing with this problem?Increase personal income taxes.If wealthy U.S. consumers save most of their tax cut, this means that, compared to government spending changes,tax changes would have a weaker multiplier effect.A change in a fixed tax will cause the consumption schedule toshift in a parallel manner.After September 11, 2001, President George W. Bush believed in the need for a fiscal stimulus. The proper fiscal policy to reflect this could include a(n)increase in government purchases.Decreasing aggregate demand to eliminate an inflationary gap often creates the problem ofUnemployment.Appropriate fiscal policy in the U.S. in 2009 would attempt toincrease aggregate demand.Contractionary fiscal policy may have some undesirable consequences. Among these ishigher unemployment.A fiscal policy that reduces taxes or increases government spending will cause a(n)increase in real GDP and an increase in the price level.An increase in taxes shifts theconsumption schedule downward.
