Question

If total spending is just sufficient to purchase an economy’s output, then the economy is

1. in equilibrium.

2. in recession.

3. in debt.

4. in expansion.

Short answer

Option (a): in equilibrium

Step-by-step solution

Step 1. Explanation for the correct option

The economy’s equilibrium is determined when the income is equal to the output production of the economy. In such a situation, the total spending, that is, the sum of consumption expenditure and investment is equal to the output production.

C + I_g = GDP

Step 2. Explanation for the incorrect options

People prefer to hoard their money rather than spend in a recession, and the economy’s demand falls short of the supply.Therefore, total spending is not enough to purchase an economy’s output.

In debt, the government takes loans from outer economies to fund their fiscal policies and projects. The total spending is funded from outside sources and is not sufficient to purchase the output.

In an economic expansion, the economy starts to increase its total spending, and GDP grows. However, the increase in income is more than the increase in output.Thus, total spending is more than the economy’s output.

The above reasons prove that total spending is less than or more than the economy‘s output, and, hence, the options are incorrect.