Explain the relationship between real GDP and aggregate planned expenditure, AE. What change to inventories takes place when the two are not equal?
What will be an ideal response?
If the GDP and aggregate planned expenditure are equal, then there is an equilibrium. But if aggregate planned expenditure is not equal to real GDP, the economy is out of equilibrium. If aggregate planned expenditure is greater than real GDP, then households, firms, and governments plan to buy more goods and services than firms are producing. Firms meet the extra demand by allowing their inventories to decrease. The decrease is unplanned on the part of firms. So when aggregate planned expenditure exceeds real GDP, there is an unplanned decrease in inventories. Similarly, if aggregate planned expenditure is less than real GDP, households, firms, and governments plan to buy less than firms produce and so there is an unplanned increase in firms' inventories.
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The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?
A) This will shift the aggregate demand curve to the left. B) This will move the economy up along a stationary aggregate demand curve. C) This will shift the aggregate demand curve to the right. D) This will move the economy down along a stationary aggregate demand curve.
If a nation is currently operating at a point inside its production possibilities curve, it
A. can increase the output of one good without decreasing the output of the other good. B. has fully employed resources. C. has no inefficiently employed resources. D. is operating at full potential.
Suppose there is an oligopoly in the bottled cold coffee industry. Which of the following is probably the most significant barrier to entry?
a. The existing firms have expertise in using game theory strategies. b. No patents have been granted to the existing firms in the industry. c. The existing firms own most of the coffee bean plantations. d. There are no tariffs imposed on coffee bean imports.
The idea that tariffs should be imposed to protect new and developing industries is referred to as
A. the infant industry argument. B. the start-up argument. C. the incubator business theory. D. the new markets theory.