Let's evaluate each statement one by one to determine which is true:
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The structural deficit changes over the business cycle.
- This statement is false. The structural deficit is the part of a government's budget deficit that exists even when the economy is at full employment. It is a long-term deficit that does not fluctuate with the business cycle, unlike the cyclical deficit, which does change with economic conditions.
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MPS + MPC = 1.
- This statement is true. MPS (Marginal Propensity to Save) and MPC (Marginal Propensity to Consume) represent the fractions of additional income that are saved and consumed, respectively. Since all additional income must either be saved or consumed, the sum of these two values always equals 1 (i.e., MPS + MPC = 1).
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At equilibrium expenditure, unplanned changes in inventory must be positive.
- This statement is false. At equilibrium expenditure, planned spending equals actual spending, which means there should be no unplanned changes in inventory. If spending exceeds what firms have planned, inventories would decrease (negative unplanned change), whereas if spending is less than planned, inventories would increase (positive unplanned change). Therefore, at equilibrium, there should be no unplanned changes in inventory.
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In the real business cycle model, there is no AD curve.
- This statement is somewhat misleading. While the real business cycle (RBC) theory primarily focuses on real shocks (like technology improvements) and does not rely on the aggregate demand (AD) curve in the same way Keynesian models do, it's not entirely accurate to say there is "no" AD curve; rather, the emphasis is on supply-side factors.
Given this analysis, the only true statement among the options provided is:
MPS + MPC = 1.
1 answer