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In macroeconomic theory, total or aggregate spending is denoted by A and total or aggregate production of income by Y
In macroeconomic theory, total or aggregate spending is denoted by A and total or aggregate
production of income by Y. Which one of the following statements is incorrect? (4 marks)
A When A is greater than Y, there is disequilibrium and Y will tend to increase.
B When A is equal to Y, there is equilibrium and Y will remain unchanged.
C When A is less than Y, there is disequilibrium and Y will decrease.
D When A is greater than Y, there is disequilibrium and A will decrease.
3. Simon borrowed R10 000 from the bank at the end of 2011 at a fixed interest rate of 20%. At the end of 2012, the
inflation rate was 25%. Inflation has been ________ to Simon; the real value of his loan plus interest
payments changed to ________. (4 marks)
A Beneficial; R9 600
B Beneficial; R4 800
C Beneficial; R8 000
D Costly; R12 500
Expert Solution
1) Solution: Option-d
Explanation: When the aggregate expenditure is equal to the aggregate production an economy is at equilibrium; and it will cause no change in income. The excess of spending over production causes an excess demand which results to an increase in prices or output. In contrast, excess of production over spending causes decrease in prices
2) Solution: Beneficial; R9600
Explanation: Interest payment = 10,000* 20% = 8000;
Inflation rate - Fixed rate of interest = 10% - 5% = 5%
Real value = Loan amount - Inflation rate * (Loan amount - Interest payment) = 10,000 - 5%* (10,000 -2000) = 9600
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