Define the terms recessionary gap and inflationary gap. Why do they occur?
What will be an ideal response?
A recessionary gap exists when the expenditure line cuts the 45° line at a level a GDP below the full employment level of output. This means that total spending is not large enough to employ all workers in the economy who are willing and able to work at current wage levels. An inflationary gap exists when the level of total spending is greater than the potential output of the economy. This means that all workers are fully employed and increases in production are not possible on a sustained long-run basis. The usual result of an inflationary gap is an increase in the price level, hence the name of the condition.
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Which of the following statements correctly differentiates between a model and a hypothesis?
A) Testing a hypothesis does not require data, whereas testing a model requires data. B) A model is a simplified representation of reality, whereas a hypothesis is a model's predictions. C) A hypothesis can be used to make predictions for the future, whereas a model can only explain the past. D) Testing a model requires data, whereas testing a hypothesis does not require data.
The portion of after-tax income a consumer does not spend on consumption is called
a. investment. b. saving. c. supply. d. temporary income.
According to the classical dichotomy, which of the following is influenced by monetary factors?
a. real GDP b. unemployment c. nominal interest rates d. All of the above are correct.
An investment should be undertaken if the present value of an expected stream of earnings from the investment exceeds the cost of the investment necessary to undertake it.
Answer the following statement true (T) or false (F)