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:

1. The structural deficit changes over the business cycle.
   This statement is false. The structural deficit refers to the portion of the deficit that exists even when the economy is at full potential output and is not affected by temporary economic fluctuations. It does not change with the business cycle, as it relates to the long-term fiscal position.

2. MPS + MPC = 1.
   This statement is true. The Marginal Propensity to Save (MPS) plus the Marginal Propensity to Consume (MPC) equals 1, as they represent the two main ways that additional income can be used.

3. At equilibrium expenditure, unplanned changes in inventory must be positive.
   This statement is false. At equilibrium expenditure, unplanned changes in inventory should be zero, meaning that production matches consumption. Positive unplanned changes in inventory would suggest that production exceeds sales, while negative changes would indicate that sales exceed production.

4. In the real business cycle model, there is no AD curve.
   This statement is true. The real business cycle (RBC) model effectively does not utilize the aggregate demand (AD) curve traditionally used in Keynesian economics; instead, it focuses on real variables influenced by productivity shocks and intertemporal choices.

In summary, the true statements are:

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