Macroeconomic equilibrium is stable in the simple model because
A) consumption falls more slowly than income when GDP is above equilibrium.
B) consumption increases more slowly than income when GDP is below equilibrium.
C) the marginal propensity to consume is less than unity.
D) taxes cause disposable income to move at some fraction of the pace at which GDP moves.
E) all of the above.

Question

Quizplus · Accepted Answer

All the statements A through D contribute to the stability of macroeconomic equilibrium in the simple model. A and B describe how consumption behavior relative to income helps adjust GDP towards equilibrium. C indicates that since the marginal propensity to consume is less than one, not all income is spent, which stabilizes the economy. D explains how taxes moderate changes in disposable income, contributing to stability. Together, these mechanisms ensure that the economy tends to return to equilibrium, making E the correct choice.

Macroeconomic Equilibrium Is Stable in the Simple Model Because