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Assumption of Perfectly Elastic Aggregate Supply in Demand-Side Models
A fundamental assumption in certain demand-side economic models, such as the multiplier model, is that firms are willing and able to supply any quantity of goods and services demanded at the prevailing price level. This implies that the aggregate supply curve is perfectly elastic in the short run, meaning that output is solely determined by the level of aggregate demand, and there are no supply-side constraints preventing firms from meeting increased demand.
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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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Assumption of Perfectly Elastic Aggregate Supply in Demand-Side Models
A national retail chain observes that over the past quarter, its warehouses have accumulated a significant amount of unsold merchandise, far more than their forecasts predicted. Based on this information alone, what is the most likely state of the broader goods market and what is the expected response from producers?
An economy is described by the following: aggregate output is currently $500 billion, while planned aggregate demand (the total amount households, firms, and the government plan to spend) is $550 billion. Based on this information, which of the following accurately describes the state of the goods market and the immediate consequence?
If an economy's goods market is in equilibrium, which of the following conditions is necessarily true?
Evaluating an Economic Statement on Market Equilibrium
An economist makes two statements about a simple economy:
Statement 1: "The total value of goods produced in any period is, by definition, equal to the total value of goods sold to final users plus any goods that were produced but not sold."
Statement 2: "The economy is in a state of balance only when the total value of goods produced is exactly equal to the total amount of goods that all agents in the economy planned to purchase."
Which of the following best analyzes the relationship between these two statements?
An economy is initially in a state where the total supply of goods equals the total demand. Suddenly, there is an unexpected and widespread decrease in consumer desire to purchase goods. Arrange the following events in the logical sequence that describes how the market adjusts to a new, lower level of equilibrium output.
Calculating Goods Market Equilibrium
Match each state of the goods market, described by the relationship between total output and total planned spending, with its corresponding effect on firm inventories.
True or False: The fact that total production in an economy is always equal to total sales plus changes in inventory (an accounting identity) means that the goods market is always in equilibrium.
Consider a graphical model where the vertical axis represents total planned spending and the horizontal axis represents total income or output. A 45-degree line shows all points where total spending equals total output. An upward-sloping 'planned spending' line shows the total amount that households, firms, and the government intend to buy at each level of income. The economy is currently operating at a level of output where firms are producing more goods than are being purchased. Which of the following descriptions accurately locates this economy's position on the graph?
Equilibrium in the Multiplier Model
Definition of Goods Market Equilibrium
Effect of Autonomous Spending Changes on Equilibrium
Learn After
In a simplified economic model, it is assumed that for any given period, the overall price level is fixed and firms are prepared to supply whatever quantity of goods and services is demanded at that price level. Within this framework, what is the direct determinant of the economy's total output?
Analyzing an Economic Shock
In an economic model where it is assumed that firms will produce any amount of output demanded at a constant price level, a sudden increase in government spending will cause both the total output and the overall price level to rise in the short run.
Implications of a Fixed-Price, Demand-Driven Model
Evaluating a Core Economic Assumption
Match each characteristic of a simplified demand-side economic model with its correct description. This model assumes that firms are willing to supply any amount of output at a fixed price level.
In an economic framework where it is assumed that firms are willing and able to supply any quantity of goods and services at a constant price level, the economy's total output is determined entirely by the level of aggregate ________.
Model vs. Reality: Analyzing a Demand Surge
Plausibility of a Demand-Driven Economic Model
An economy is initially in equilibrium. It operates under a model where the overall price level is fixed, and firms are willing to supply any quantity of goods demanded at that price. Suddenly, there is an unexpected increase in autonomous investment spending. Arrange the following events in the logical sequence that would occur according to this model, leading to a new equilibrium.