1) Which of the following cause(s) a decrease in the demand side equilibrium GDP
ID: 1152144 • Letter: 1
Question
1) Which of the following cause(s) a decrease in the demand side equilibrium GDP?
a) A stronger home currency.
b) A weaker home currency.
c) An increase in the real interest rate.
d) a and c
e) b and c.
2) Which of the following cause(s) an increase in the demand side equilibrium GDP?
a) A stronger home currency.
b) A weaker home currency.
c) An increase in the real interest rate.
d) a and c
e) b and c.
3) Independent consumption
a) Represents a component of consumption that is independent of the disposable income.
b) Decreases when consumer wealth goes down.
c) Decreases when consumer wealth goes up.
d) Represents the minimum level of consumption when disposable income is zero.
e) a, b and c.
4) The 45 degree line drawn to find the demand side equilibrium
a) Shows all points at which the aggregate demand is equal to aggregate supply.
b) Shows all points at which the general price level is equal to the total expenditures.
c) Is below the expenditure line if the economy produces more than the equilibrium GDP.
d) Is above the expenditure line if the economy produces less than the equilibrium GDP.
e) None of the above.
Explanation / Answer
1) d) a and c
A strong currency causes appreciation of currency so that exports are reduced and imports are increased. Net exports fall and AD shifts left. A higher real interest rate reduces investment spending and so AD shifts left. Both are demand side factors and cause real GDP to fall.
2) b) A weaker home currency.
A weaker currency causes depreciation of currency so that imports are reduced and exports are increased. Net exports rise and AD shifts rightt.
3) a) Represents a component of consumption that is independent of the disposable income.
This is the part of consumption which is not related to income and remains unchanged when income increases
4) a) Shows all points at which the aggregate demand is equal to aggregate supply.
When expenditure line is above the 45 degree line, economy produces less than equilibrium GDP and when it lies below it, economy produces more than equilibrium GDP. Every point on this line shows AE = Y.
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