A key result of the equilibrium aggregate expenditure model is that it:
A) can explain why the economy should always be at natural rate GDP.
B) illustrates how the government always moves us towards equilibrium GDP.
C) can illustrate how an economy can be at an equilibrium that is below natural rate GDP.
D) shows how classical notion that the economy will always tend towards natural rate GDP is correct.

Question

Quizplus · Accepted Answer

The equilibrium aggregate expenditure model can show how an economy can be in a state of equilibrium that is below the natural rate GDP. This implies that the economy is not necessarily always at its maximum potential output and there may be unused resources in the economy. This result is important as it highlights the need for government intervention, such as fiscal policy, to move the economy towards its natural rate GDP.

A Key Result of the Equilibrium Aggregate Expenditure Model Is