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11 November, 08:15

If total spending rises from one year to the next, then which of the following could not be true? A. the economy is producing a larger output of goods and services, and goods and services are selling at lower prices. B. the economy is producing a smaller output of goods and services, and goods and services are selling at higher prices. C. the economy is producing a smaller output of goods and services, and goods and services are selling at lower prices. D. the economy is producing a larger output of goods and services, and goods and services are selling at higher prices.

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  1. 11 November, 08:21
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    C. the economy is producing a smaller output of goods and services, and goods and services are selling at lower prices.

    Explanation:

    An economy's level of spending reflects total spending on consumption, investment, government spending, ie, aggregate demand. The effect of increased spending experienced by an economy will have one of the following implications:

    i) increase in production and change in selling price

    ii) in an extreme case of an inflationary economy, the increase in spending does not affect real production, it is just a monetary effect of artificial price increases.

    However, no increase in expenditure is compatible with decreasing production and selling price at the same time. This would be the case in a recessive scenario, incompatible with rising expenses.
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