In the above diagram, what happens if the real GDP is $3 trillion? $5 trillion? $7 trillion? What is the equilibrium level of real GDP? Why?
What will be an ideal response?
At real GDP of $3 trillion, planned real investment is greater than real saving, which means households are buying more than producers had anticipated. There is an unplanned inventory decrease of $500 billion, and businesses increase production and hiring. At $5 trillion, planned real investment and planned real saving are equal, so this is the equilibrium. At $7 trillion, planned real saving is greater than planned real investment so there is an unplanned increase in inventories of $500 billion. Businesses reduce production and lay off workers, forcing real GDP back towards $6 trillion.
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Suppose the supply of chocolate chips in Paulina is perfectly elastic and the government imposes a tax on the sellers. Which of the following is most likely to be true? a. The deadweight loss of the tax equals zero
b. The supply curve is a vertical line. c. The elasticity of supply equals zero. d. The tax burden is shared equally between the buyers and the sellers.
A seller's reservation price is generally equal to:
A. the market price. B. the seller's marginal benefit from producing an additional unit. C. the buyer's reservation price. D. the seller's opportunity cost of producing an additional unit.
Cost-push inflation is characterized by a(n):
A. decrease in aggregate supply and no change in aggregate demand. B. increase in aggregate demand and no change in aggregate supply. C. increase in aggregate supply and a decrease in aggregate demand. D. decrease in both aggregate supply and aggregate demand.
One timing problem in using fiscal policy to counter a recession is the "operational lag" that occurs between the:
A. Start of the recession and the time it takes to recognize that the recession has started B. Start of a predicted recession and the actual start of the recession C. Time fiscal action is taken and the time that the action has its effect on the economy D. Time the need for the fiscal action is recognized and the time that the action is taken