TRUE OR FALSE a. When potential real GDP is equal to actual real GDP, there is...

TRUE OR FALSE
a. When potential real GDP is equal to actual real GDP, there is no unemployment.
b. A significant increase in wages will shift aggregate supply curve to the right in the short run.
c. When the government decided to reduce their spending, then the aggregate supply curve will decrease or shift to the left in the short run.
d. If the central Bank wants to expand aggregate demand, it can increase the money supply, which would increase the interest rate.
e. To find spending multiplier, we have to calculate one divided by marginal propensity to consume.

Explain why true and why false!

Solutions

Expert Solution

Answer : 1) The answer is "False".

When actual real GDP and potential real GDP are same then the natural unemployment occur in the economy. Natural unemployment is the sum of frictional unemployment and structural unemployment. So, the given statement is false.

2) The answer is "False".

If wage rate increase then production cost increase. Hence producers will decrease their production level. As a result, the aggregate supply will decrease which will shift the aggregate supply curve to leftward. So, the given statement is false.

3) The answer is "False".

Government spending is a component of aggregate demand. So, if government spending decrease then the aggregate demand will decrease which will shift the aggregate demand curve to leftward. Therefore, the given statement is false.

4) The answer is "False".

If money supply increase then interest rate decrease. Due to lower interest rate people save less and spend more. As a result, the aggregate demand increase. Therefore, the given statement is false.

5) The answer is "False".

The formula of spending multiplier is,

Spending multiplier = 1 / Marginal propensity to save.

Therefore, the given statement is false.

Rahul Sunny answered 1 week ago

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