Consider the Simplest Macro Model with Demand- Determined Output, Where

question 55

Multiple Choice

Consider the simplest macro model with demand- determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $890 billion. We can expect that

• A)firms will see an increase in inventories, and they will respond by decreasing output, thereby decreasing actual national income.
• B)firms will see a decrease in inventories, and they will respond by increasing output, thereby increasing actual national income.
• C)firms will decrease autonomous investment by $10 billion until equilibrium national income is reached at $890 billion.
• D)actual national income will increase until equilibrium national income is reached at $900 billion.
• E)firms will increase autonomous investment by $10 billion until equilibrium national income is reached at $900 billion.

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Definitions:

Principal Amount

The original sum of money borrowed in a loan or invested, distinct from interest or profit earned.

Invested

To be invested refers to the allocation of resources, such as capital or time, into a particular venture, asset, or effort with the expectation of generating a future return.

Present Value Equation

A mathematical formula used to determine the current value of a future amount of money or stream of cash flows given a specific rate of return.

FV

Future Value, the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.