If the full employment level of income is $1200 billion and the present level of income is $1000 billion
A)an inflationary gap exists
B)autonomous expenditure is too low for a full employment equilibrium
C)autonomous expenditure is too high for a full employment equilibrium
D)a decrease in autonomous expenditure is required
E)government purchases of goods and services should be reduced

Question

Quizplus · Accepted Answer

The full employment level of income is the level of income where all resources are used efficiently and there is no involuntary unemployment. In this scenario, the full employment level of income is $1200 billion, which means that the economy is currently not operating at full employment.

Option A is incorrect because an inflationary gap exists when the actual level of output exceeds the full employment level, resulting in rising prices and inflation.

Option C is also incorrect because if autonomous expenditure is too high, it would lead to an excess demand for goods and services, causing inflationary pressures.

Option D might be a possible solution, but without any additional information, we cannot conclusively say that a decrease in autonomous expenditure is required to achieve full employment.

Option E is not a relevant solution to the problem at hand because reducing government purchases of goods and services would reduce aggregate demand, leading to lower output and employment.

Therefore, the best choice is B, which states that autonomous expenditure is too low for a full employment equilibrium. Autonomous expenditure refers to the spending that is independent of income, such as investment or government spending. If autonomous expenditure is too low, it means that not enough is being spent to reach the full employment level of income. To achieve full employment equilibrium, policymakers might need to take measures to increase autonomous expenditure, such as increasing government spending or providing tax incentives for firms to invest.

If the Full Employment Level of Income Is $1200 Billion