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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鈥檚 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鈥�. The equilibrium point will slide upwards along the same supply curve from e to e鈥�. The prices and output will increase simultaneously to P鈥� and Q鈥�, respectively, to reach a new equilibrium point e.鈥�

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鈥� and Q鈥�, the economy鈥檚 net worth will also boom for the financial year. Moreover, the real GDP will increase as the output has expanded from Q to Q鈥�, 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 Glitter Gulch, a gold mining firm, increased its sales revenues on newly mined gold from \(100 million to \)200 million between one year and the next. Assuming that the price of gold increased by 100 percent over the same period, by what numerical amount did Glitter Gulch鈥檚 real output change? If the price of gold had not changed, what would have been the change in Glitter Gulch鈥檚 real output?

If an economy has sticky prices and demand unexpectedly increases, you would expect the economy鈥檚 real GDP to

  1. increase.

  2. decrease.

  3. remain the same.

If the demand for a firm鈥檚 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.

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, 鈭�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鈥檚 average growth rate over the five years?

Has economic output always grown faster than the population? When did modern economic growth begin? Have all of the world鈥檚 nations experienced the same extent of modern economic growth?
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