Use the following to answer question 6: Table: Aggregate Spending Real GDP YD 50

Question

Use the following to answer question 6: Table: Aggregate Spending Real GDP YD 500 100 1,000 500 500 600 2,0001,300 600 2,000 1,700 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,000 3,300 600 600 600 2500 2,500 600 3,000 3,500 2,500 2,900 600 600 6. (Table: Aggregate Spending) Look at the table Aggregate Spending. Suppose the economy has no government spending and no foreign trade. With no taxes or transfers, real GDP equals disposable income (YD). At what level of real GDP will the economy find its income-expenditure equilibrium? A) $2,000 B) $2,500 C) $3,500 D) $4,500 7. A S50 million increase in investment spending will eventually cause equilibrium real GDP to: A) decrease by $50 million. B) increase by $50 million. C) increase by more than $50 million. D) increase by less than $50 million. 8. Whenever real GDP exceeds planned aggregate spending: A) firms reduce production, reducing real GDP B) households increase consumption, increasing disposable income. C) firms increase production, increasing real GDP D) households decrease consumption, decreasing disposable income. 9. If the economy is in a recessionary the appropriate expansionary monetary policy will be A) B) C) D) decrease in government spending. increase in the discount rate. decrease in the money supply. purchases of government securities in the open market. Page 3

Explanation / Answer

6. Ans: $3500

Explanation:

YD = C + Iplanned

3500 = 2900 + 600

7. Ans: Increase by more than $50 million

8. Ans: firms reduce production, reducing gdp

9. Ans: Purchase of the government securities in the market

Explanation:

When Fed purchases the government securities in the market, money flows from the hands of Fed to the hands of public leading to increase in money supply in the economy.

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