Question

1)

Which of the following may cause a departure from Equilibrium GDP:

a. imports

b. taxes

c. increase in savings

d. all the above

2)

Which of the following is NOT an ‘injection’ into the income-expenditures stream:

a. exports

b. government purchases

c. investment

d. imports

3)

A limitation of the Aggregate Expenditures model is that it doesn’t directly show:

a. price level changes

b. any role for net exports

c. investment spending

d. none of the above

4)

The Aggregate Demand (AD) curve may shift to the right due to:

a. rise in household debt spending

b. an increase in interest rates

c. higher business taxes

The Aggregate Demand (AD) curve may shift to the left due to:

1. decline in real income

2. higher business taxes

3. fall in the price level

4. reduction in household debt

Answer 1

1. All of the above

Any change in imports will lead to a change in equilibrium GDP. Any change in tax will lead to a change in disposable income which further changes the consumption expenditure and causes a change in equilibrium GDP. Similarly, change in savings lead to a change in investment and equilibrium GDP.

2. Imports. Imports causes a leakage in the economy as money goes out to different country. Export is an injection as money comes into the economy.

3. None of the above

4. a rise in household debt spending. A rise in household debt spending increases the consumption expenditure which in turn raises the aggregate demand. Further, AD curve shifts rightward.

5. Decline in real income.

When real income falls, disposable income falls and consumer's purchasing power falls. This induces consumers to spend less on consumption expenditure. Hence, aggregate demand falls and shift to the left.