Answer True or False for the following questions: 1. If the consumption function

Question

Answer True or False for the following questions:
1. If the consumption function lies below the 45 degree line dissaving is occuring.
2. If the AE curve lies below the 45 degree line there is a inflation at full employment.
3. Output is increased to get rid of an inflationary gap.
4. The aggregate demand curve is upward sloping.
5. The aggregate supply curve is upward sloping.
6. If the AE curve lies above the 45 degree line there is a recession at full employment.
7. If the AE curve lies below the 45 degree line spending is more than income at full employment.
8. Aggregate demand is total goods produced in the economy.
9. Aggregate supply is total goods bought in the economy.
10. Fiscal policy is money and interest rate policy.

Explanation / Answer

(1) False

Since Saving = Income - Consumption, if the consumption function is below (lower than) 45-degree line (income), Saving is positive, i.e. there is no dissaving.

(2) False

If AE lies below 45-degree line, aggregate expenditure is less than output and so, aggregate demand is lower than the output in economy. Firms are experiencing unplanned inventory accummulation. Since demand is insufficient, there is decrease in price level, not inflation.

(3) False

Inflationary gap is caused when aggregate demand exceeds aggregate supply, and to lower inflation, output is decreased.

(4) False

Aggregate demand is downward sloping in the Price-Real GDP plane.

(5) true

(6) False

If AE lies above 45-degee line, aggregate demand is higher than output, which indicates high economic growth.

(7) False

If AE lies below 45-degree line, consumption spending is less than income, resulting in savings.

(8) False

Aggregate demand is value of total goods and services demanded in an economy.

(9) false

Aggregate supply is total value of goods and services produced in an economy.

(10) False

Fiscal policy deals with government spending & taxation, while monetary policy deals with money & interest rate.

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