1. Move the green pointer on the horizontal axis to an income level of 430. Then click on the “income adjustment” button. What happened? Why did income return to equilibrium at 470? The GDB rises to restore equilibrium. This is because at GDP=430, the aggregate expenditures is higher than production. This is a state of imbalance so that production opportunities will rise to match the total spending.
2. Move the green pointer on the horizontal axis to an income level of 510. Then hit the “income adjustment” button. What happened? Why did income return to equilibrium at 470?
GDP decreases to restore equilibrium. This is because at GDP=510, production is higher than aggregate expenditures. This means that there will an excess in production. The excess will force production to reduce to maintain profitability until equilibrium point is achieved. So GDP will always return to equilibrium point of 430 where aggregate expenditure equals production.
3. What happened to Income in Chapter 10 exercise when Investment was increased?
Income also increases as indicated by GDP line at 6000.
4. Explain why the resulting increase in equilibrium Income was greater than the change in Investment spending.
Investment will produce some level of gains or in numbers this is a multiplier. This gain (multiplier) is what causes the GDP change in equilibrium to be higher.
5. Give three real-world forces that could cause a “shift in Aggregate Demand.”
5.1 An increase in consumption will increase the Aggregate Demand.
5.2 An increase in government expenditure will increase the Aggregate Demand.
5.3 An increase in net export will increase the Aggregate Demand.
6. Give three real-world forces that could cause a “shift in Aggregate Supply.”
6.1 An increase wages and salaries will increase the Aggregate Supply.
6.2 Education and Training will shift the Aggregate Supply.
6.3 Research and Development will shift the Aggregate Supply.
References
C. MacConnell, S. Brue (2005). Economics: Principles, Problems, and Policies, 16/e. Graphing Exercise: Equilibrium GDP (Chapter 10.1). Retrieved January 27, 2007 from
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