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:

Economic Profits

Profits exceeding the total costs, including both explicit costs and implicit costs such as opportunity costs.

ATC

ATC, or average total cost, is the sum of all production costs divided by the quantity of output produced, encompassing both fixed and variable costs.

MC

Stands for Marginal Cost, which is the change in total cost that arises when the quantity produced is incremented by one unit; it is a key concept in economic theory guiding decision-making on the optimal level of production.

Marginal Cost Curve

A graphical representation showing how the cost of producing one more unit of a good changes as production volume changes.