Suppose the economy in the diagram below is in long-run equilibrium. If government spending decreases and causes a movement from point A to point B in the diagram below, what are the short-run effects? Explain fully
What will be an ideal response?
In the above figure, point A is the original equilibrium, with a price level of 100 and total planned expenditures on final goods and services equal to $14 trillion. A decrease in government spending causes the aggregate demand curve to shift to the left. In the short run, total planned expenditures and equilibrium real Gross Domestic Product (GDP) falls to $13.5 trillion. The price level falls to 90.
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The income elasticity of demand is
A) positive for a normal good. B) zero for an inferior good. C) less than one for an income elastic normal good. D) Only answers A and B are correct. E) Answers A, B, and C are correct.
In the long run, firms in a competitive market make zero economic profit. This induces most firms to leave the industry
Indicate whether the statement is true or false