We would expect real national income to be "demand determined" when
1)there is large-scale unemployment of resources in the economy;
2)firms are price setters;
3)firms have excess capacity.
A)1,2,and 3
B)1 and 2
C)2 and 3
D)1 only
E)3 only

Question

Quizplus · Accepted Answer

When there is large-scale unemployment of resources in the economy, it means that the economy is not operating at its full capacity. In such a situation, demand determines national income. Similarly, when firms are price setters, they have some degree of market power, which enables them to influence the price of their products. This means that changes in demand will affect the level of output and, consequently, national income. Finally, when firms have excess capacity, they have the ability to increase their output without having to invest in new capital. This means that changes in demand will have a direct impact on the level of output and national income. Therefore, all three conditions suggest that national income is demand-determined.

We Would Expect Real National Income to Be "Demand Determined