Question

Because a decrease in real autonomous spending results in a ________ in the price level, the ultimate effect on real gdp is ________ that predicted by the multiplier.

Answer 1

Because a decrease in real autonomous spending results in a fall in the price level, the ultimate effect on real GDP is smaller that predicted by the multiplier.

Another significant discovery is made by Keynesian economics. You've learnt that Keynesians think fluctuations in total spending are what ultimately determine the level of economic activity in the short run (or aggregate demand).

Assume that full employment prevails in an economy because the macro equilibrium occurs at the potential GDP.

Keynes noted that even while the economy starts at potential GDP, it is improbable that it will stay there because aggregate demand has a propensity to fluctuate.

In 2007, the collapse of the housing market caused a decline in U.S. investment spending. The Great Recession subsequently hit the American economy as a result.

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