### Educational Content: Understanding Economic Output and Interest Rates**Question:**Based on the diagram, if potential output equals 5,000 and the real interest rate is 5 percent, then there is a ______ gap and the Fed must ______ the real interest rate so that output will equal potential output.**Graph Explanation:**The graph presented is an economic model illustrating Potential Aggregate Expenditure (PAE) against Output (Y). 1. **Axes:** - The vertical axis represents Potential Aggregate Expenditure (PAE). - The horizontal axis represents Output (Y).2. **Lines:** - A 45-degree line bisects the graph; this line represents points where PAE equals Output (Y), indicating equilibrium. - Three Expenditure Lines are shown, each corresponding to different real interest rates: - Expenditure Line (r = 1%) - Expenditure Line (r = 3%) - Expenditure Line (r = 5%)3. **Observations:** - The Expenditure Lines slope upwards, indicating a positive relationship between expenditure and output. - At a real interest rate of 5%, the expenditure line doesn’t intersect with the 5,000 potential output, suggesting an output gap.**Options:**- A recessionary; reduce- No output; not change- A recessionary; raise- An expansionary; raiseThis question helps illustrate how varying interest rates can influence economic output and guide monetary policy adjustments.

A recessionary gap is where actual output is less than potential output. An inflationary or…

Answered: Based on the diagram, if potential…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Interest rate (percent per year) MS XA MD₁ 2 0 3.0 3.1 3.2 3.3 3.4 3.5 Real money (trillions of 2009 dollars) The figure above illustrates the effect of O a decrease in real GDP. an increase in real GDP. an increase in the monetary base. MDO a decrease in the monetary base.
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Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will generate a(n) ____ output gap and the price level will ceteris paribus. O inflationary; increase O inflationary; decrease O recessionary; increase O recessionary; decrease
During a boom, govemments tend to nun budget surpluses. What effect will these surpluses have on the savings supply curve? Select one: O a. There will be no change in the curve. O b. It will shift the curve to the left. Oc It will shift the curve to the right. O d. It will result in a movement along the curve.
The AS curve shifts to the left when O All listed options are correct. the cost of production rises the government does expansionary fiscal policy O net exports rises O we lower interest rates
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(in trillions) anupuedgejetoally $35 $30 $25 $20 $15 $10 $5 $5 $10 $15 $20 $25 45° Line AE $30 $35 Real GDP (in trillions) The central bank has recently conducted monetary policy that substantially reduces the real interest rate. As a result, autonomous spending increases by $5 trillion. Examine the effects of this reduction in the real interest rate by identifying (1) the amount of autonomous spending before the real interest rate falls, (2) the amount of induced spending before the real interest rate falls, (3) the level of equilibrium Real GDP before the real interest rate falls, (4) the value of the spending multiplier, (5) the level of equilibrium Real GDP after the real interest rate falls, and (6) the amount of induced spending after the real interest rate falls.
Think of the AD-AS model with an upward-sloping AS curve. Suppose the economy is initially at its long-run equilibrium. What is the impact of an unexpected increase in money supply in the short run and in the long run? O a. In the short run, output rises above its natural level. In the long run, output returns to its natural level and the price level is higher than what it was initially. O b. In the short run, output falls below its natural level. In the long run, output returns to its natural level and the price level is higher than what it was initially. O c. In the short run, output rises above its natural level. In the long run, output returns to its natural level and the price level is lower than what it was initially. O d. In the short run, output falls below its natural level. In the long run, output returns to its natural level and the price level is lower than what it was initially.
1. A change in autonomous spending results to a shift of the LM curve either to the left or right. O a. False; movement along the IS curve O b. False; movement along the LM curve O c. True O d. False; shift of the IS curve 2. Which of the following statements is true? 3. O a. The goods and money markets can never be in equilibrium. O b. The goods and money markets are in equilibrium at the points where the money market is in equilibrium. O c. The goods and money markets are in equilibrium at their point of intersection only. O d. The goods and money markets are in equilibrium at the points where the goods market is in equilibrium. Which of the following describes the steepest investment schedule? O a. 1-450-8(3) O b. 1=450-2(3) O c. 1=450-9(3) O d. 1=450-5(3)
How do fluctuations in aggregate demand and short-run aggregate supply bring fluctuations in real GDP around potential GDP? Starting from a full-employment equilibrium, a decrease in aggregate demand and creates gap. O A. increases real GDP above potential GDP; an inflationary OB. decreases real GDP below potential GDP; an inflationary OC. increases real GDP above potential; a recessionary O D. decreases real GDP below potential GDP; a recessionary _, short-run aggregate , and the economy returns to a full-employment In the long run, the money wage rate supply equilibrium. O A. rises; increases B. falls; decreases C. rises; decreases D. falls; increases
A country's economy is close to full employment. The government then decides to launch a tax cut program. Simultaneously, the central bank launches a bond sale program of the same magnitude. What can we say about the country's aggregate product (Y), price level (P) and interest rate (i) in the short run? We can expect Y to increase, P to increase, and i to increase. O b. We can expect Y to remain unchanged, P to remain unchanged, and i to increase. O c. We can expect Y to remain unchanged, P to remain unchanged, and i to remain unchanged. Od. We can expect Y to decrease, P to decrease, and i to decrease. Oe. None of the alternatives is correct.

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