1) State whether each of the following statements is true or false. Explain your answers
using diagrams where appropriate.
a. If output is $2,400 billion and total planned expenditures are $2,200, unintended
investment will be $200, and firms will respond by producing more.
b. If equilibrium GDP is less than potential GDP, the economy is said to have an
c. If our exports or our imports increase, then equilibrium GDP will rise by a greater
d. From an income-expenditures diagram, we can see that when I increases, the
equilibrium level of GDP increases by a larger amount. The change in equilibrium
GDP shown in this diagram assumes that the price level has changed, i.e., the price
level has fully adjusted to a new, higher level.
e. When the Cold War ended, leading to a substantial decrease in the level of our
government spending, equilibrium GDP fell by an amount equal to the decline in
f. The “oversimplified multiplier” formula shows the impact of a change in one of the
components of aggregate demand (C, I, G, or (X-IM)) on equilibrium GDP, under
the assumption that the price level is fixed.
2) Use income-expenditure diagrams to illustrate the multiplier effect of:
a) An increase in G
b) A decrease in C
c) An increase in (X – IM)
d) A decrease in I
Explain the reasons behind the effects shown in your diagrams.