The economy is in equilibrium,TP = TE,and Real GDP is $4,000 billion.The MPC is 0.70,the multiplier is operative,and idle resources exist at each expenditure round.Government purchases fall by $17 billion.As a result,the TE curve shifts __________,inventory levels unexpectedly __________,business firms __________ the quantity of goods and services they produce,and Real GDP __________ by __________.

Question

Quizplus · Accepted Answer

When government purchases fall by $17 billion, the aggregate expenditure will reduce by $17 billion as well, which means the TE curve will shift downward. This will lead to an unexpected increase in inventory levels, causing firms to decrease the quantity of goods and services they produce. Since the multiplier is operative, the decrease in government purchases of $17 billion will cause the Real GDP to fall by approximately $56.7 billion (multiplier effect: 1/ (1-0.70) x (-$17 billion) = -$56.7 billion). Therefore, option A is the correct answer to this question.

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