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Chapter 23: Problem 2

Use a \(45^{\circ}\) -line diagram to illustrate macroeconomic equilibrium. Make sure your diagram shows the aggregate expenditure function and the level of equilibrium real GDP and that your axes are properly labeled.

Short Answer

Expert verified
The solution is a diagram with labeled Axes as 'Aggregate Expenditure' for Y-Axis and 'Real GDP' for X-Axis. A \(45^{\circ}\) line runs from the origin representing points where Aggregate Expenditure equals GDP. The aggregate expenditure function is drawn as a curve, intersecting the 45-degree line. This intersecting point is the equilibrium real GDP.

Step by step solution

01

Draw the Axes

Begin by drawing the axes for the diagram. Label the vertical axis as 'Aggregate Expenditure' (AE) and the horizontal axis as 'Real GDP'
02

Draw the 45 Degree Line

Draw a line that rises at a \(45^{\circ}\) angle from the origin. This line represents all the points where Aggregate Expenditure equals Real GDP.
03

Draw the Aggregate Expenditure Curve

Draw the aggregate expenditure curve in your diagram. This curve illustrates the total spending in the economy at a given level of real GDP.
04

Mark the Equilibrium

Find the point where the aggregate expenditure curve intersects the 45-degree line. This point represents the level of equilibrium real GDP. Label this point clearly.

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Most popular questions from this chapter

A Federal Reserve publication noted that "the shedding of unwanted inventories often accounts for a large portion of the decline in gross domestic product (GDP) during economic recessions." What does the author mean be "shedding of unwanted inventories"? What makes the inventories unwanted? Why would shedding inventories lead to a decline in GDP?

What is the multiplier effect? Use a \(45^{\circ}\) -line diagram to illustrate the multiplier effect of a decrease in government purchases

Into which category of aggregate expenditure would each of the following transactions fall? a. The Jones family buys a new car. b. The San Diego Unified School District buys 12 new school buses. c. The Jones family buys a newly constructed house from the Garcia Construction Co. d. Joe Jones orders a Burberry coat from an online site in the United Kingdom. e. Prudential insurance company purchases 250 new iPads from Apple.

What are the four main determinants of investment? How would a change in interest rates affect investment?

An article in the Wall Street Journal on the housing market stated, "Steady job growth, rising wages and low interest rates have helped prop up housing demand." Why do low interest rates increase the demand for housing? In which component of aggregate expenditure does the Bureau of Economic Analysis include purchases of new houses?
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