The equilibrium aggregate expenditure model:
A) can explain why an economy should always be at the natural rate of GDP.
B) illustrates how government always moves an economy towards equilibrium GDP.
C) illustrates how an economy can achieve equilibrium below the natural rate of GDP.
D) proves that an economy will always tend towards the natural rate of GDP.

Question

Quizplus · Accepted Answer

The equilibrium aggregate expenditure model illustrates how an economy can achieve equilibrium below the natural rate of GDP. This is because in the model, equilibrium occurs where aggregate expenditure equals output, and the level of aggregate expenditure can be below the level required for full employment. Therefore, the model does not prove that an economy will always tend towards the natural rate of GDP (option D). Option A is also incorrect because the model shows that equilibrium GDP can occur at different levels than the natural rate. Option B is incorrect because government policy is not necessarily in play in the model.

The Equilibrium Aggregate Expenditure Model