## Quiz 26 :

Demand-Side Equilibrium: Unemployment or Inflation

Answer:

Graphical presentation of equilibrium level of GDP

In Figure (1), GDP is measured on horizontal axis and consumption expenditure is measured on vertical axis.

Figure - 1

The increase in consumption shifts the consumption expenditure curve upward from

to

. As a result, the new equilibrium level of GDP is obtained at point

where GDP and consumption expenditure intersect the 45-degree line.

As the consumption increases by $40, the consumption expenditure schedule increases and GDP and consumption expenditure obtain equilibrium when both are at $1,440. Hence, the consumption multiplier effect is $120.

Answer:

An equilibrium level of GDP of an economy can be derived using the following method:

……(2)

Substitute the respective values in Equation (2), to obtain the equilibrium level of GDP.

Since

, substitute Y and T in the above equation.

Since T is $1,200, the value of T is substituted in the above equation and rewritten as follows:

To simply the equation, bring 0.75Y to the left-hand side of the equation.

Hence, the equation can be written as

Hence , the equilibrium level of GDP demanded in an economy is

Comparison of derived result with Table-1 and Figure-2 from the book.

The derived level of GDP is $6,000, which is equal to the total expenditure given in Table-1and Figure-2.

Hence, the comparison of the derived result indicates an equilibrium level of GDP.

Answer:

If the imports of an economy consistently exceed the exports of an economy, then the net exports will be negative.

Negative net exports will push down the equilibrium level of GDP

Based on the discussion in the chapter, increase in net exports will have a multiplier effect on GDP. It means a small increase in net exports will cause an increase in GDP at a higher rate. On the other hand, a small fall in net exports will cause the GDP to fall at a higher rate.

Thereby, the multiplier effect of negative net exports will push the equilibrium level of GDP down.