Question

in the aggregate expenditures model, the equilibrium gdp is: select one: a. not necessarily equal to the full-employment gdp b. assumed to be equal to the potential gdp level c. always above the potential gdp level d. always less than the full-employment gdp level

Answer 1

The equilibrium GDP in the aggregate expenditures model is not necessarily equal to the full-employment GDP and can indicate either a recessionary or inflationary gap. The equilibrium is depicted by the point where aggregate expenditures equal national income, typically on the 45-degree line in a Keynesian Cross Diagram. The correct option is option a.

Step-by-step explanation:

In the aggregate expenditures model, the equilibrium GDP is not necessarily equal to the full-employment GDP. This can be seen in an example where the aggregate expenditure line intersects the 45-degree line at a point that is below the potential GDP, indicating a situation known as a recessionary gap. This occurs when the level of aggregate expenditure is too low to reach full employment, leading to unemployment as firms do not hire the full employment number of workers.

Additionally, in the Keynesian Cross Diagram, if output was above the equilibrium level, excess inventory would accumulate, indicating that the current level of production is unsustainable.

Conversely, if output was below the equilibrium level, aggregate expenditure would exceed output, suggesting that there is more demand than supply. Equilibrium occurs only where national income and aggregate expenditures are equal, illustrated by the point on the 45-degree line.