Assumptions of Spare Capacity and Fixed Wages in the Multiplier Model

Example of Low Capacity Utilization Due to Insufficient Demand

Capacity Constrained

Delayed Investment Response to Rising Capacity Utilization

An economy's manufacturing sector is reported to be operating at a 95% utilization rate, while its service sector is at 70%. If there is a sudden, significant increase in economy-wide demand for both goods and services, what is the most probable immediate outcome?

Strategic Response to Increased Demand

Comparing Economic Responses to a Demand Shock

Evaluating a Fiscal Stimulus Policy

A manufacturing firm reports that it is operating at a 50% capacity utilization rate. This indicates that the firm's production is constrained by outdated technology and it must invest in new capital to increase output.

Match each economic scenario with the most appropriate description of its capacity utilization.

When a significant portion of an economy's productive resources, such as factories and equipment, are idle due to insufficient demand, the economy is described as having a low ____ rate.

An economy is recovering from a recession. Initially, there is widespread spare productive capacity. A government stimulus package then causes a strong and sustained increase in aggregate demand. Arrange the following events in the most likely chronological order.

Central Bank Policy Decision

Two competing firms, Firm A and Firm B, produce identical products. Firm A is operating at 95% of its maximum production capability, while Firm B is operating at 60%. Both firms experience an identical, sudden, and significant increase in customer orders. Which of the following describes the most likely immediate response of each firm?