1. When the U.S economy is temporarily producing above (past) its potential inco
ID: 1109693 • Letter: 1
Question
1. When the U.S economy is temporarily producing above (past) its potential income/output level, which of the following is least likely to happen?
a. inventories will decline
b. prices will rise
c. there will be a shortage of labor and raw materials
d. production levels will continue to increase quite dramatically.
2. if a fall in the value of the follar increases aggregate expenditures by $60 billion due to foreign consumers purchasing more U.S goods (due to their relatively lower price). Given this, the U.S's AD curve will likely:
a. shift out by more than $60 billion
b.shift out by less than $60 billion
c. shift out by exactly $60 billion
d. not shift at all
3. The economy is in a long run equilibrium only at:
a. the intersection point between the SAS curve and the aggregate demand curve
b. the intersection point between the SAS curve and the LAS curve
c. the intersection point between the LAS curve and the aggregate demand curve
d. any point on the LAS curve
4. In the AP/AE Model (Multiplier Model), aggregate production creates:
a. an equal amount of expenditures, but not necessarily an equal amount of savings
b. an equal amount of savings, but not necessarily an equal amount of expenditures
c. an equal of income, but not necessarily an equal amount of expenditures
d. an equal amount of expenditures, but not necessarily an equal amount of income
Explanation / Answer
1. d. production levels will continue to increase quite dramatically.
2. c. shift out by exactly $60 billion
Increase in purchase by foreigners means increase in exports of US by $ 60 billion. So, it will increase AD by $ 60 billion and shift it rightwards by the same amount.
3. a. the intersection point between the SAS curve and the aggregate demand curve
Equilibrium is where intersection of AD and SAS is on the LRAS curve.
4. c. an equal of income, but not necessarily an equal amount of expenditures
The 45 degree line reflects the assumption of Multiplier Model that production creates an equal amount of income. If the economy is not at equilibrium, production does not create an equal amount of expenditures.
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