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Assumptions of Spare Capacity and Fixed Wages in the Multiplier Model
The multiplier model's ability to translate increased spending into higher real output hinges on two key assumptions: the existence of spare capacity and fixed wages. These conditions ensure that firms' production costs do not rise as they expand output, enabling them to meet higher aggregate demand by increasing supply without adjusting their prices. If these conditions are not met, an increase in spending would instead lead to higher prices and wages, rather than a significant rise in real output.
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Introduction to Macroeconomics Course
Ch.3 Aggregate demand and the multiplier model - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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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 This indicates that the firm's production is constrained by outdated technology and it must invest in new capital to increase output.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?
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Output Adjustment Assumption in the Multiplier Model
Reduced Multiplier Effect without Spare Capacity and Fixed Wages
Analyzing Economic Responses to Increased Spending
Evaluating the Impact of Government Stimulus
An economy is experiencing a period of high unemployment and widespread industrial facilities operating well below their maximum production capabilities. In this context, if the government significantly increases its spending on public projects, what is the most probable immediate effect on the economy?
A government stimulus package will have the same expansionary effect on real production and employment regardless of whether the economy has widespread unemployment and idle factories or is already operating at its maximum possible output.
Contrasting Economic Responses to Increased Demand
Match each economic scenario with the most likely outcome that would result from a significant, economy-wide increase in spending.
An economy is characterized by factories operating at their maximum possible output and a very low unemployment rate, causing businesses to compete for a limited pool of workers. If there is a sudden, large surge in overall spending, what is the most probable immediate outcome?
The Role of Production Costs in Economic Expansion
Evaluating Economic Policy Advice
For an initial increase in aggregate spending to result primarily in a larger increase in real output rather than price inflation, firms must be able to expand production without a significant rise in their costs. This condition holds when there is spare productive capacity and when the availability of unemployed workers prevents upward pressure on ____.