A fall in investor confidence causes the equilibrium level of output to fall
What will be an ideal response?
The initial excess of leakages over injections caused by low investment spending is corrected by a contraction in output, income, and saving. At E1, leakages and injections are again equal (table 9.16 chapter 9)
But at the start of the Great Depression, the 1929 stock market crash and other events
caused business and investor confidence to plummet. (Consumer confidence and financial
wealth also plummeted, but we are simplifying the story by concentrating on firms.) Producers
became very uncertain about whether they would be able to sell what they produced, so they
cut back radically on their investment spending. This is modeled in Figure 9.16 as a drop in aggregate demand caused by a drop in intended investment from 140 to 60. (Note that 60 is the number used in Table 9.3, so that AD1 in Figure 9.16 is identical to the AD curve in Figure
9.12.) With the drop in AD, income of 800 is no longer an equilibrium. Consistent with the adjustments toward equilibrium that we just discussed, output, income, and spending contract until a new equilibrium (E1) is reached at a level of 400.
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If a bushel of corn sells for $2 in the United States and for 4,000 COP (Colombian peso) in Colombia, and if 1 dollar is worth 2,200 COP, then:
a. the corn is 400 COP more expensive in Colombia. b. the corn is 400 COP cheaper in Colombia. c. the price of a bushel of corn equals $2 in both the United States and Colombia. d. the price of corn is 4,000 COP lower in Colombia than in the United States. e. the price of corn is $0.20 lower in the United States than in Colombia.
Graphs are valuable because they facilitate interpretation of data.
Answer the following statement true (T) or false (F)
Which of the following is a principle concerning how people interact?
a. Markets are usually a good way to organize economic activity. b. Rational people think at the margin. c. People respond to incentives. d. All of the above are correct.
Under which of the following conditions would the interdiction of illegal drugs result in a decrease in the quantity of drugs sold and in a decrease in total spending on illegal drugs by drug users?
a. The interdiction has the effect of shifting the demand curve for illegal drugs to the right. b. The price elasticity of demand for illegal drugs is 1.3. c. The price elasticity of supply for illegal drugs is 0.8. d. As a result of the interdiction, the price of illegal drugs increases by 20 percent and the quantity of illegal drugs sold decreases by 16 percent.