Which of the following is true?

Question

The structural deficit changes over the business cycle.

MPS + MPC = 1.

At equilibrium expenditure, unplanned changes in inventory must be positive.

In the real business cycle model, there is no AD curve

Answer 1

Let's evaluate each statement one by one:

1. The structural deficit changes over the business cycle.

   • False. The structural deficit is the portion of the budget deficit that exists even when the economy is at full potential (non-cyclical). It does not change with fluctuations in the business cycle, unlike the cyclical deficit, which varies depending on economic conditions.

2. MPS + MPC = 1.

   • True. The marginal propensity to consume (MPC) and the marginal propensity to save (MPS) are related such that MPS + MPC = 1. This relationship reflects the idea that any additional income is either consumed or saved.

3. At equilibrium expenditure, unplanned changes in inventory must be positive.

   • False. At equilibrium expenditure, unplanned changes in inventory should be zero; this is the point where aggregate expenditure equals total output. If unplanned changes in inventory are positive, it means that actual sales are lower than expected, indicating that the economy is not in equilibrium.

4. In the real business cycle model, there is no AD curve.

   • True. The real business cycle (RBC) theory emphasizes real (as opposed to nominal) shocks and suggests that business cycles are a result of changes in technology and productivity. In the RBC framework, the focus is on supply-side factors, and the aggregate demand curve is not typically emphasized in the same way it is in Keynesian models.

Based on this evaluation, the two true statements are:

• MPS + MPC = 1.
• In the real business cycle model, there is no AD curve.