If actual real GDP is greater than the equilibrium level of real GDP (i.e., the aggregate expenditure function is below the 45-degree line), how is equilibrium restored?
At the current level of real GDP, planned spending (C + I) is less than production. The amount of goods
and services produced is greater than the amount people intend to buy. Inventories rise above the levels
firms desire to hold. These unintended inventory increases are a signal to firms to reduce production.
Production will continue to fall until desired inventory levels are restored or when the amount firms
produce just equals aggregate expenditure.
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In 2007, Trailblazer Bicycle Company produced a mountain bike that was delivered to a retail outlet in November of 2007. The bicycle was sold to E.Z. Ryder in March of 2008. This bicycle is counted as:
a) consumption in 2007 and as negative investment in 2008. b) negative investment in 2007 and as consumption in 2008. c) negative investment in 2007 and as investment in 2008. d) investment in 2007 and as negative investment in 2008.
Suppose market demand and supply are given by Qd = 100 - 2P and QS = 5 + 3P. If a price ceiling of $15 is imposed,
A. there will be neither a surplus or shortage. B. there will be a surplus of 40 units. C. there will be a shortage of 20 units. D. there will be a shortage of 40 units.
A policy reaction function describes how the action a policymaker takes depends on:
A. the reaction of special interest groups. B. public approval ratings. C. the political affiliation of the policymaker. D. the state of the economy.
Starting from long-run equilibrium, a decrease in autonomous investment results in ________ output in the short run and ________ output in the long run.
A. lower; potential B. higher; higher C. higher; potential D. lower; higher