Why is there a \"two-way\" link between consumption and GDP? How does an increas

Question

Why is there a "two-way" link between consumption and GDP? How does an increase in disposable income affect the consumption function? An increase in expected future income? If the consumption function shifts upward, what happens to the saving function? Why? When is actual aggregate expenditure different from planned aggregate expenditure? Why happens to being the two back to equality? Explain why income taxes reduce the size of the expenditure multiplier. When the equilibrium real GDP is below potential GDP, how does the unemployment rate compare with the natural rate? What is the results of this state of affairs that restores the long-run equilibrium? What is a recessionary gap? How does the economy adjust to eliminate a recessionary gap?

Explanation / Answer

A deep recession in the world economy decreases aggregate demand, which decreases real GDP
and lowers the price level. A sharp rise in oil prices decreases short-run aggregate supply, which
decreases real GDP and raises the price level. The expectation of huge losses in the future
decreases investment and decreases aggregate demand, which decreases real GDP and lowers the
price level.
b. The combined effect of a deep recession in the world economy, a sharp rise in oil prices, and the
expectation of huge losses in the future decreases both aggregate demand and short-run
aggregate supply, which decreases real GDP and might raise or lower the price level.
c. The Toughtimes government might try to increase aggregate demand by increasing its purchases
or by cutting taxes and the Toughtimes Fed might increase the quantity of money and lower
interest rates. These policies could increase real GDP, but they would also raise the price level.
2. a. The strong expansion in the world economy increases Coolland

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