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Chapter 6: Q4. (page 129)

If an economy has fully flexible prices and demand unexpectedly increases, you would expect the economy’s real GDP to:

  1. increase.

  2. decrease.

  3. remain the same.

Short Answer

Expert verified

Option (a) increase

Step by step solution

01

Effect of unexpected change in demand in the market

The unexpected increase in demand will shift the demand curve towards the right from D to D’. The equilibrium point will slide upwards along the same supply curve from e to e’. The prices and output will increase simultaneously to P’ and Q’, respectively, to reach a new equilibrium point e.’

Therefore, the supply and prices also boom to maintain equilibrium between supply and demand in the economy.

02

Effect of unexpected change in demand on the real GDP

As the production and prices have increased to P’ and Q’, the economy’s net worth will also boom for the financial year. Moreover, the real GDP will increase as the output has expanded from Q to Q’, though it will be a little less than the nominal GDP (as it considers both the price and output change).

The nominal GDP will measure the change in output at current prices. So it will include the price effect also. But real GDP will eliminate the price effect and only consider an increase in production at constant prices.

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Most popular questions from this chapter

Suppose that the annual rates of growth of real GDP in Econoland over a five-year period were sequentially as follows: 3 percent, 1 percent, −2 percent, 4 percent, and 5 percent. What was the average of these growth rates in Econoland over these five years? What term would economists use to describe what happened in year 3? If the growth rate in year 3 had been a positive 2 percent rather than a negative 2 percent, what would have been Econoland’s average growth rate over the five years?

Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both? How does saving relate to investment and thus to economic growth? What role do banks and other financial institutions play in aiding the economic growth process?

If the demand for a firm’s output unexpectedly decreases, you would expect its inventory to

a. increase.

b. decrease.

c. remain the same.

d. increase or remain the same, depending on whether or not prices are sticky.

How does investment as defined by economists differ from investment as defined by the general public? What would happen to the amount of economic investment made today if firms expect the future returns to such investment to be very low? What would happen to the amount of economic investment today if firms expect future returns to be very high?

Refer to Figure 6.1b and assume that the price is fixed at $37,000 and that Buzzer Auto needs 5 workers for every 1 automobile produced. If demand is DM and Buzzer wants to perfectly match its output and sales, how many cars will Buzzer produce, and how many workers will it hire? If, instead, demand unexpectedly falls from DM to DL, how many fewer cars will Buzzer sell? How many fewer workers will it need if it decides to match production to these lower sales?
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