Question

The economy is in equilibrium, TP = TE, and Real GDP is $2,000 billion. The MPC is 0.75, the multiplier is operative, and idle resources exist at each expenditure round. Autonomous investment spending falls by $10 billion. As a result, the TE curve shifts __________, inventory levels unexpectedly __________, business firms __________ the quantity of goods and services they produce, and Real GDP __________ by __________.
A. downward; rise; decrease; falls; $7.5 billion
B. downward; fall; increase; rises; $40 billion
C. downward; rise; decrease; falls; $40 billion
D. upward; rise; decrease; falls; $40 billion
E. downward; fall; decrease; falls; $7.5 billion

Answer 1

Answer:

C. downward; rise; decrease; falls; $40 billion

Explanation:

Autonomous investment spending falls by $10 billion . As a result, the TE curve shifts downward , inventory levels unexpectedly rises , business firms decrease the quantity of goods and services they produce , and Real GDP falls by (10/1 - MPC) = (10/1 - 0.75) = 10/0.25 = $40 billion.