(1) An observer of the economy notices that over the last nine months the unempl

Question

(1) An observer of the economy notices that over the last nine months the unemployment rate has increased from 4% to 7%. During the same time, the rate of growth of the real GDP decreased from 3.5% to 1.5%. From this information, you can conclude that:

a. Inflation is probably rampant in this economy b. This economy is existing on its Production Possibilities Curve

c. A recession might be starting in this economy d. This economy is over utitlizing its resources.

(2) A(n) ______ shift of the consumption function causes a leftward shift of the aggregate _______ curve.

a. Downward; Supply b. Downward; Demand

c. Upward;Suppy d. Upward; Demand

(3) Given a MPC = 0.80 and an intial decrease in consumption spending of $40, what is the potential cumulative decrease in AD (multiplier effect)?

a. $40 b. $80 c.$200 d. $400

Explanation / Answer

1) Option C is correct because recessionary trend begins with higher unemployment and reduced level of GDP or its growth rate. The two tend to move in opposite direction aggravating the economic crisis.

(2) Option B is correct because consumption is a part of aggregate demand function and when it falls, the AD shifts to the left.

(3) Given a MPC = 0.80 and an intial decrease in consumption spending of $40, what is the potential cumulative decrease in AD (multiplier effect)?

Multiplier = 1 / 1 - MPC = 1/ 1 - 0.8 = 5. Now a decrease in consumption spending of $40 will cause a decline in AD by 40 x 5 = $200. OPTION C is correct

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