1. Suppose real GDP is currently $500 billion. Assuming that the price level remains constant, this would mean that (first blank) (choices in picture) 2. Which would send a signal to firms to either: A. Increase productionB. Keep production the sameC. Decrease production ### 6. Aggregate Expenditure and IncomeSuppose the following table shows consumption (C), investment (I), government purchases (G), and net exports (NX) in a hypothetical economy for various levels of real GDP. Assume that the price level remains unchanged at all levels of real GDP.| Real GDP (Billions of dollars) | C (Billions of dollars) | I (Billions of dollars) | G (Billions of dollars) | NX (Billions of dollars) ||--------------------------------|-------------------------|-------------------------|-------------------------|--------------------------|| 500 | 425 | 200 | 150 | -50 || 600 | 450 | 200 | 150 | -50 || 700 | 475 | 200 | 150 | -50 || 800 | 500 | 200 | 150 | -50 || 900 | 525 | 200 | 150 | -50 |The following graph shows real GDP on the horizontal axis and aggregate expenditure on the vertical axis.**Instructions:**Use the orange line (square symbol) to plot a 45-degree line on this graph. Then use the blue points (circle symbols) to plot the aggregate expenditure line for this economy.### Explanation of Graphs and Diagrams:The table presented above lists the various components that comprise the aggregate expenditure in an economy at different levels of real GDP. These components include:- **Consumption (C):** The amount of goods and services consumed.- **Investment (I):** Expenditures on goods and services intended to create future benefits, such as business investments in equipment.- **Government Purchases (G):** Total government expenditures on goods and services.- **Net Exports (NX):** The value of a country's exports minus its imports.To graphically represent this data, the x-axis (horizontal axis) of the graph will display Real GDP values, while the y-axis (vertical axis) will display Aggregate Expenditure values. The steps to construct this graph are:1. **45-Degree Line:** Plot a 45-degree line (using square symbols) where every point on this line indicates that the value on the y-axis is equal to the value on the x-axis.2. **Aggregate Expenditure Line:** Using blue points (circle symbols), **Understanding Economic Equilibrium and Inventory Adjustments**### The Concept of Economic EquilibriumEconomic equilibrium occurs when the economy is balanced, meaning there is no inherent tendency to change the levels of output, employment, and other economic variables.- **When the economy is in equilibrium**: - **Aggregate expenditure must also equal $500 billion**.### Inventory Adjustments in Response to DisequilibriumWhen the economy is not in equilibrium, firms will often adjust their inventory levels accordingly:1. **Reduction in Inventories**: - **Firms would have a $225 billion reduction in inventories**. - This occurs when the actual output exceeds aggregate expenditure, leading firms to deplete their inventories to meet the demand.2. **Excess Inventories**: - **Firms would have excess inventories of $225 billion**. - This situation arises when aggregate expenditure falls short of the actual output, resulting in unsold goods piling up in firms' inventories.### Implications of Inventory Changes- When there is a change in inventory levels and the price level remains constant, it sends signals to firms: - If firms experience a reduction in inventories, it signals them to **increase production to replenish the stocks**. - If firms face excess inventories, it indicates the need to **reduce production until the surplus inventories are drawn down**.This dynamic adjustment helps in guiding firms' production decisions to align with aggregate demand, thereby moving the economy towards equilibrium.---**Note**: The text is supplemented with a drop-down interaction to indicate possible choices for the sentences, which would typically be part of an educational exercise to reinforce understanding of economic concepts.

The aggregate supply signifies the amount of final commodities and services that business firms are…

Answered: 1. Suppose real GDP is currently $500…

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC