The economy is in equilibrium,TP = TE,and Real GDP is $2,000 billion.The MPC is 0.75,the multiplier is operative,and idle resources exist at each expenditure round.Autonomous investment spending falls by $10 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 __________.
A) downward; rise; decrease; falls; $7.5 billion
B) downward; fall; increase; rises; $40 billion
C) downward; rise; decrease; falls; $40 billion
D) upward; rise; decrease; falls; $40 billion
E) downward; fall; decrease; falls; $7.5 billion

Question

Quizplus · Accepted Answer

When autonomous investment spending falls by $10 billion, the TE curve will shift downward because there is less spending in the economy. Inventory levels will unexpectedly rise because firms will produce more than consumers are willing to buy. Business firms will decrease the quantity of goods and services they produce in response to the increase in unsold inventory. Real GDP will fall by $40 billion because the decrease in autonomous investment spending will lead to a decrease in aggregate demand, causing a decrease in both output and price levels. The multiplier effect will amplify the initial decrease in spending, leading to a larger decrease in Real GDP.

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