Chapter 9

Question 1

Recessionary Gap

Answer 1

The amount by which the equilibrium level of real GDP falls short of potential GDP.

Question 2

Inflationary Gap

Answer 2

The amount by which equilibrium real GDP exceeds the full-employment level of GDP.

Question 3

What condition permits demand-side equilibrium?

Answer 3

If consumers are saving the same amount that investors are investing. (If injections equal leakages).

Question 4

Will the Keynesian economy permit unemployment?

Answer 4

Yes, when total spending is too low to employ the entire labor force.

Question 5

Sum of an infinite geometric progression:

Answer 5

1/(1-R). R is the common ration, which is our propensity to consume in the case of macro.

Question 6

Multiplier including taxes

Answer 6

1/{1-b(1-t)}

Question 7

Y=

Answer 7

C+I+G+(X-IM) ; want it to equal E.

Question 8

What does the price level do to the consumption function and how?

Answer 8

Higher prices decrease the demand for goods and services because they erode the purchasing power of consumer wealth. Leads to a lower consumption function as the whole line is moved down.