When the U.S. economy is temporarily producing above (past) its potential income

ID: 1109610 • Letter: W

Question

When the U.S. economy is temporarily producing above (past) its potential income/output level, which of the following is least likely to happen?

There will be a shortage of labor and raw materials.

Production levels will continue to increase quite dramatically.

The Aggregate Production/Aggregate Expenditures Model (Multiplier Model) is not designed to answer which one of the following questions?

How did the economy arrive at its current price and output level given information in the past?

How will a change in autonomous expenditures change equilibrium output?

The Long Run Aggregate Supply Curve (LAS) is:

vertical because it shows that a higher price level will not bring about higher output.

downward sloping because it shows that an increase in aggregate demand will reduce both the price level and output.

When the mpe is less than 1, an increase in income will:

increase expenditures by more than the increase in income.

increase expenditures by less than the increase in income.

The multiplier is smaller, other things equal, when:

the mpe is the same.

impossible to tell given the information.

In the AP/AE Model (Multiplier Model), aggregate equilibrium income will most likely increase following:

a decrease in business investment.

a decrease in taxes.

The effect of an increase in taxes on Business and Households (without any accompanying changes in government expenditures) would most likely:

Inventories will decline.

1. Production levels will continue to increase quite dramatically.

2. How did the economy arrive at its current price and output level given information in the past?

The multiplier model explains how income and output will change given a change in aggregate expenditures and a fixed price level.

3. vertical because it shows that a higher price level will not bring about higher output.

4. increase expenditures by more than the increase in income.

5. Multiplier = 1 / (1 - mpe)

When mpe = 0.2 then multiplier is 1/0.8 = 1.25

When mpe = 0.5 then multiplier is 1/0.5 = 2

So, increase in mpe leads to increase in multiplier.

Answer is b) the smaller the mpe

6. d. a decrease in taxes

Decrease in taxes increases consumption expenditure of the consumer and increases Aggregate Equilibrium income.

7. b. shift the AD curve in to the left

Increase in taxes decreases disposable income of consumer which means decrease in consumption expenditure. Decrease in C shifts AD curve leftwards.

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