ECON 1BB3 Lecture Notes - Lecture 9: Consumption Function, Potential Output, Government Spending

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ECON 1BB3 Lecture 7: Economic Growth and Aggregate Supply; AE and AE
Question 1
- If the economy is producing past its potential output level, which best describes the
economic state?
a. Unemployment rate is higher than the natural rate of unemployment
b. The economy is producing at maximum capacity
c. The economy is producing less than its productive capacity
d. The unemployment rate is less than the natural rate of unemployment
- Answer: D
Question 2
- What do fixed resource prices help to explain?
a. Why firms increase their output in the short run when price level increases
b. Why, when the price level decreases, firms keep production levels constant in the
short run
c. Why firms sell output in the short run at fixed prices
d. Why, when price levels increase, firms increase output in the long run
- Answer: A
o Fixed resource prices are usually fixed in the short run, flexible in the long run
o Use the word ‘sticky’
o B is incorrect, because when the price level decreases, the opposite happens
Chapter 9 Graphs
- There are many in chapter 9
- C, I, G, Net Exports, Interest Rate
Question 3
- If a graph of the consumption function has disposable income on the horizontal axis and
consumption on the vertical axis, which of the following is true?
a. An increase in net worth moves along the consumption function to the right, and an
increase in disposable income shifts it up
b. An increase in net wealth moves left, and increase in disposable income shifts
function down
c. Increasing net wealth shifts the function up and increasing disposable income moves
to right
d. An increase in net wealth shifts the consumption function down and increasing
disposable income moves to the left
- Answer: C
o An increase in disposable income moves along the right, and an increase in net
wealth shifts the entire line up
Aggregate Expenditure:
- Any increase in an autonomous component of AE will shift the AE line up
o This causes Real GDP to increase
- The vertical change will be much smaller than the horizontal change
Question 4
- What happens if planned spending is greater than planned output?
a. Unintentional inventory increases
b. Reduced GDP
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