The economy is in equilibrium,TP = TE,and Real GDP is $4,555 billion.The MPC is 0.80,the multiplier is operative,and idle resources exist at each expenditure round.Government purchases rise by $10 billion.As a result,the __________ curve shifts __________,inventory levels unexpectedly __________,business firms ___________ the quantity of goods and services they produce,and Real GDP __________ by __________.
A) TE; downward; fall; increase; rises; $10 billion.
B) TP; rightward; fall; decrease; falls; $50 billion
C) TE; upward; fall; increase; rises; $50 billion
D) TE; downward; rise; increase; rises,$50 billion

Question

Quizplus · Accepted Answer

When government purchases rise by $10 billion, this will increase aggregate demand (AD). As the economy is initially in equilibrium (TP=TE), the increase in AD will lead to an increase in TE. As a result, the TE curve will shift upward. Multiplying the change in government purchases by the multiplier (1/(1-MPC)) will give the total change in Real GDP. In this case, the change in Real GDP will be $50 billion (10/(1-0.8)). Therefore, Real GDP will rise by $50 billion, and there will be no change in inventory levels, because idle resources exist at each expenditure round.

The Economy Is in Equilibrium,TP = TE,and Real GDP Is