Other things being constant, what will be the effect of each of the following upon the equilibrium level of GDP?
(a) An increase in the amount of liquid assets consumers are holding;
(b) A sharp rise in stock prices;
(c) A rapid upsurge in the rate of technological advance; and
(d) A sharp increase in the interest rate.

Question

Quizplus · Accepted Answer

The Answer is (a) This should increase GDP because an increase in consumer wealth would lead to an increase in consumer spending which would shift the aggregate expenditures curve upward to a higher equilibrium output level.
(b) The probable effect of a sharp rise in stock prices would be to increase in consumption by shareholders who have seen an increase in wealth, thus shifting the aggregate expenditures curve upward and increasing the equilibrium level of GDP.It also could encourage business investment with funds gained by issuing new shares of stock at the now higher prices.This would also tend to increase GDP.
(c) This should increase GDP because of the impact on new investment spending and possible increased consumer purchases of goods having the new technology.The aggregate expenditures curve will shift upward and real output will rise.
(d) A sharp increase in the interest rate would limit consumer durable purchases and also limit investment spending.Both of these events would cause a downward shift in aggregate expenditures causing a decrease in GDP.

Other Things Being Constant, What Will Be the Effect of Each