Author Question: Suppose equilibrium for an economy occurs when C + I + G + X = 14 trillion. If the real Gross ... (Read 100 times)

dalyningkenk · **on:** Jun 30, 2018

Suppose equilibrium for an economy occurs when C + I + G + X = 14 trillion. If the real Gross Domestic Product (GDP) is 13 trillion, then unplanned inventories are

A) increasing, and real Gross Domestic Product (GDP) will contract.
B) increasing, and real Gross Domestic Product (GDP) will expand.
C) decreasing, and real Gross Domestic Product (GDP) will expand.
D) decreasing, and real Gross Domestic Product (GDP) will contract.

Question 2

Using a graph, show the effects of a weaker dollar on the economy. Explain.

What will be an ideal response?

abctaiwan · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

C

Answer to Question 2

The original equilibrium is where AD1 intersects AS1. A weaker dollar causes aggregate supply to decrease, represented by a shift from AS1 to AS2. But the weaker dollar makes imports more expensive and exports cheaper, so aggregate demand increases from AD1 to AD2. The new equilibrium is where AD2 intersects AS2, with an increase in real Gross Domestic Product (GDP) and a rise in the price level. This result is due to the fact that aggregate demand shifted further than aggregate supply. Real Gross Domestic Product (GDP) would have fallen if the shift in aggregate supply had been greater than the shift in aggregate demand.